What are Wrapped Tokens?
Wrapped tokens are digital assets that represent a coin or token from a different blockchain, allowing it to be used on another blockchain. The primary function of wrapped tokens is to bridge liquidity and interoperability between separate blockchain networks. This is crucial in the decentralized finance (DeFi) space, where assets must be easily transferable and usable across various platforms.
For example, Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin on the Ethereum blockchain. One WBTC is backed by one Bitcoin, and users can mint WBTC by depositing BTC into a custodian. Similarly, when users want to convert WBTC back into BTC, they can do so through the custodian.
Wrapped tokens offer several advantages, including increased accessibility to different DeFi platforms, enhanced liquidity, and integration into various digital ecosystems. However, they also come with risks, such as reliance on custodians for security and potential smart contract vulnerabilities.
Investors looking to diversify their portfolios can consider wrapped tokens as a means to gain exposure to different crypto assets within the DeFi landscape. As the cryptocurrency market evolves, the role of wrapped tokens is becoming increasingly significant in fostering innovation and liquidity.