{"id":123277,"date":"2023-11-10T09:58:18","date_gmt":"2023-11-10T09:58:18","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=123277"},"modified":"2023-11-10T09:58:18","modified_gmt":"2023-11-10T09:58:18","slug":"wrapped-crypto-tokens","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/wrapped-crypto-tokens","title":{"rendered":"Wrapped Crypto Tokens"},"content":{"rendered":"

What are Wrapped Crypto Tokens?<\/span><\/h2>\n

Wrapped crypto tokens are essentially replicated copies of existing digital coins or cryptocurrencies<\/a>. These digital tokens<\/a> are often backed by another crypto asset on a different blockchain network<\/a> or operate a different token standard<\/a>.<\/p>\n

Wrapped tokens maintain an equivalent value to the original cryptocurrency, usually on a 1:1 basis.<\/p>\n

However, unlike the original cryptocurrency they are based on, wrapped tokens can seamlessly operate on non-native blockchain protocols<\/a>. Additionally, they can be redeemed for the original digital currency<\/a>.<\/p>\n

Techopedia Explains<\/h3>\n

The term ‘wrapped’ is used because these tokens<\/a> are tied and simulated versions of another cryptocurrency. They serve as synthetic versions, offering enhanced functionality compared to the original cryptocurrency with rigid feature setups or restrictive applicable use cases.<\/p>\n

Given the rapid rise of decentralized finance<\/a> (DeFi) in the last three years, the need to access the liquidity<\/a> of top-grossing virtual assets has become prominent.<\/p>\n

Cryptocurrencies like Bitcoin<\/a>, with a strong brand and market pull, were not initially compatible with DeFi protocols like Aave on the Ethereum network<\/a> due to the absence of smart contract<\/a> functionality.<\/p>\n

To address this, a wrapped version of the foremost proof-of-work<\/a> (PoW) decentralized currency, known as wrapped Bitcoin<\/a> (wBTC), was introduced in 2019 to cater to the growing demand for this asset.<\/p>\n

This development allowed Bitcoin users to seamlessly utilize wBTC on smart contract-powered DeFi platforms with minimal friction.<\/p>\n

While wrapped crypto tokens initially began with native crypto assets like Bitcoin, the concept has since been extended to include other blockchain-based assets.<\/p>\n

Now, there are wrapped versions for stablecoins like USDT<\/a>, USDC<\/a>, and DAI. Non-fungible tokens<\/a> (NFTs) or digital collectibles can also be synthesized to create wrapped versions.<\/p>\n

How Do Wrapped Crypto Tokens Work?<\/span><\/h2>\n

Despite their presence in the cryptocurrency space for quite some time, wrapped crypto tokens remain unfamiliar to many investors. This is due to a lack of understanding regarding the intricate process of creating these digital tokens.<\/p>\n

To shed light on the workings of wrapped tokens, let’s delve into the three key entities involved in their creation:<\/p>\n

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  1. Merchants\/Bridges<\/strong>: These are decentralized entities that enable the locking of a digital coin on the Ethereum network to mint synthesized ones. Additionally, merchants have the ability to burn the wrapped tokens, which results in the release of the originally locked cryptocurrency back to the user.<\/li>\n
  2. Custodians<\/strong>: Custodians are responsible for safeguarding wrapped tokens within the Ethereum network. Their primary function is to ensure the security of these tokens.<\/li>\n
  3. Decentralized Autonomous Organizations (DAOs)<\/strong>: These entities operate as a decentralized working group and are tasked with the responsibility of modifying the list of merchants and custodians operating in the network. Hence, they can add or remove a custodian based on a situation-by-situation basis. They utilize a multi-signature cryptocurrency wallet<\/a>, which a group of elected individuals signs to make these decisions.<\/li>\n<\/ol>\n

    How to Create a Wrapped Crypto Token<\/span><\/h2>\n

    Now that we’ve explained the entities involved, the process for creating a wrapped token, such as a wrapped Bitcoin, involves the following steps:<\/p>\n