Just as Bitcoin is probably the most popular cryptocurrency around, the most popular wrapped token is also based around Bitcoin. Wrapped bitcoin (wBTC), as of July 2022, is the biggest wrapped token in terms of market capitalization (over $5.6 billion according to CoinMarketCap). It commands roughly 80% of the maret share of wrapped tokens. The second largest wrapped token by market capitalisation also is linked to Bitcoin – renBTC.
Both wBTC and renBTC allow Bitcoin owners to interact with Ethereum-based DEFI protocols. Many people wrap their Bitcoin to contribute to liquidity pools on DEXs like Uniswap to earn commissions, for example. wBTC also supports the TRON network.
To wrap their Bitcoin to wBTC, they would send BTC to a wBTC custodian who mints new wBTC at a 1:1 ratio. These custodians store their BTC. Upon redemption, wBTC is burned and the BTC is returned.
This 1:1 ratio thus is essentially a peg, which is why you might encounter the term “pegged” tokens when dealing with wrapped crypto assets.
Not all wrapped tokens work in this way. Wrapped Ether, or wETH is simply created on the same Ethereum network, but allows it to be transacted like a specific type of token (ERC20 token) much like all other crypto and utility tokens created on the Ethereum network.
Of course, it is also possible to buy wrapped tokens directly on DEXs. You could buy wBTC on an Ethereum-based DEX, for example, and simply redeem it to get actual BTC.
The value (or price) of wrapped tokens is usually very closely aligned to their original token since they are all pegged in equal ratio. When you think about the minting process as a “wrapping” process, you can think of redemption or burning as an “unwrapping” process.
As wrapped tokens are minted and redeemed (burned) or wrapped and unwrapped, an equilibrium is constantly being achieved between wrapped tokens and their underlying currency. For every X amount of wrapped tokens that are minted and in existence, there must be the equivalent X amount of original tokens held to back the value of their wrapped counterparts.
Other wrapping protocols or products
Coming back to the blockchain interoperability issue, there are many blockchain products or protocols that work specifically to improve interoperability. These are sometimes called “bridges” since what they are doing is essentially creating bridges between different blockchain networks, to allow people to port digital assets across different blockchains.
Some examples of bridges are Polygon, Arbitrum, and Optimism, which are increasingly popular across DEFI networks and DEX aggregators. Their products or bridges attempt to simplify the wrapping process for the user and allow them to directly trade or swap assets from different blockchains, without going through the technical process of wrapping and redeeming.
Instead, these bridges create wrapped tokens and redeem them behind the scenes, sometimes with even lower costs and quicker speeds than manual bridging.
When using these, you may never even encounter wrapped tokens – at least, not visibly.
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