Wrapped token, an innovation to enhance the potential of interoperability in the blockchain world.

Another type of token that blockchain and cryptocurrency enthusiasts may be somewhat familiar with is the wrapped token. This article provides insights into the wrapped token's objectives and highlights why both investors and developers should take notice of its significance.

What is a wrapped token?

A wrapped token or wrapped cryptocurrency is a digital asset that reflects the actual value of digital currencies that run on multiple blockchain networks.  It depends on tokenization to make it simple for users to conduct transactions across the network and serves as the token standard for transferring assets into various blockchain networks. This can address the industry's lack of interoperability and help spread the decentralized financial ecosystem across networks. Wrapped Bitcoin (WBTC), a well-known example of a wrapped token, will fix its price at 1:1 with that of Bitcoin (BTC), as an example. WBTC is unique in that it can be used with either the ERC-20 or TRC-20 token standards, allowing for use on both the Ethereum and Tron networks.

In another context, the wrapped token is comparable to stablecoins like USDT, whose value is determined by the price in dollars (1 USDT is equal to 1 dollar). Similarly, WBTC's value benchmark is established by the price of 1 BTC.Simply stated, the wrapped token is a method of enabling users to use digital currencies on various blockchain networks and to replace the actual value of the traditional asset by 1:1 in addition to the traditional network of digital currencies.

How does the wrapped token work?

The "minting" and "burning" processes will be used to create and eliminate the wrapped token, respectively. For example, the creation of WBTC that contains BTC-referred assets will be forwarded to the custodians who manage BTC in the digital vault. When BTC is locked, they can mint or create WBTC in the equivalent number.

The procedure resembles wrapping the referred asset. The wrapped token or wrapped asset is rebuilt for use in other blockchains after the smart contract has finished wrapping it up in the digital vault.

The WBTC token-burning process follows the same steps as the coin-minting process. However, WBTC will be removed from the cycle and replaced with an equivalent amount of BTC, which will then be added back to the cycle system as usual.

The wrapped token’s distinctive features

Wrapped tokens like WBTC facilitate the interoperability of multiple blockchain networks. It makes it easier for users to transfer their assets and utilize the tools and features of other blockchain networks. This seamless interoperability leads to faster transactions, reduced fees, and increased potential for profitable outcomes for users.

Nowadays, wrapped tokens like WBTC circulate in the system more frequently. Additionally, there are more bridges, which are a solution that enables users to use wrapped tokens across blockchain networks.

The wrapped token’s security

The security of the wrapped token stands out because it was created using a smart contract, which can offer a higher level of security than the previous financial system. The value of the wrapped token is also independent of any projects or businesses.

However, the blockchain bridge often becomes the target of asset theft by hackers, so using the wrapped token carries some risk. The creator of Ethereum, Vitalik Buterin, stated in January 2022 that the security flaws in cross-chain applications were the reason he had a bad opinion of them at the time.

Conclusion

The wrapped token has the potential to significantly influence people's perceptions of interoperability in the blockchain industry. It enables users the ability to use assets from the various blockchains in the ecosystem and opens up opportunities for cross-chain communication and network collaboration.