What is a Wrapped Token?
A wrapped token is a cryptocurrency that represents an asset from one blockchain on another blockchain. This process enables interoperability among different blockchain networks. Wrapped tokens are essentially a form of tokenization that adheres to a specific token standard, such as ERC-20 for Ethereum-based assets.
Purpose of Wrapped Tokens
The main purpose of wrapped tokens is to facilitate cross-chain transactions, allowing users to leverage the advantages of various blockchain ecosystems without needing to rely on a centralized exchange. This promotes liquidity and expands market access.
How Wrapped Tokens Work
Wrapped tokens are created by locking the original asset in a smart contract, which then mints an equivalent amount of the wrapped token on the target blockchain. For example, when Bitcoin is wrapped to create wBTC (Wrapped Bitcoin), the equivalent amount of BTC is held in a smart contract while wBTC is issued on Ethereum.
Benefits of Wrapped Tokens
- Enhanced Liquidity: Wrapped tokens can be traded on different decentralized exchanges.
- Increased Access: Users can utilize assets across various platforms.
- Interoperability: They allow seamless transactions between blockchains.
In summary, wrapped tokens play a vital role in enhancing the interoperability of tokens across various blockchain networks, driving innovation and usability in the cryptocurrency space.