What is a Wrapped Token?
A wrapped token is a digital asset that represents another cryptocurrency or token on a different blockchain. It is created by 'wrapping' the original asset, which involves locking it in a smart contract and issuing a corresponding new token on the target blockchain. This process allows users to leverage the original asset's value while gaining access to features and capabilities of the new blockchain.
Wrapped tokens play a significant role in the Decentralized Finance (DeFi) ecosystem by enabling greater interoperability between different blockchains. For example, Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin (BTC) on the Ethereum blockchain. This allows Bitcoin holders to participate in DeFi applications, such as lending and yield farming, which are primarily built on Ethereum.
The wrapping process typically guarantees a 1:1 peg to the original asset. Each wrapped token is backed by the actual cryptocurrency held in reserve, ensuring that the wrapped token's value remains stable and reliable. This mechanism fosters trust in the wrapped asset, enabling investors to utilize their cryptocurrencies in innovative ways.
Furthermore, wrapped tokens can enhance liquidity and open up investment opportunities across various platforms and DeFi projects, making them essential components in the modern cryptocurrency investing landscape.