Trying to trade Bitcoin on the Ethereum Blockchain is like trying to run a PC game on a Mac – it won’t work unless you install special software. Fortunately, with blockchains, this process is pretty straightforward thanks to something called a wrapped token. But what exactly are wrapped tokens and how do they work?
What are Wrapped tokens?
Simply put, a wrapped token is a token that represents a cryptocurrency from another blockchain or token standard and has the same value as the original cryptocurrency. Unlike the original cryptocurrency, the wrapped token can be used on certain non-native Blockchains and then used for the original cryptocurrency. One of the biggest benefits of Wrapped tokens is that they create greater interoperability between non-compliant cryptocurrencies and blockchains. They open the door to possibilities such as lending or borrowing Bitcoin on DeFi platforms, for example. This provides more liquidity to decentralized services and increases the utility of crypto assets.
What is Wrapped Bitcoin?
The most popular wrapped token is wrapped Bitcoin (wBTC), an ERC-20 version of Bitcoin. As of February 2022, the token has a market cap of over $10 billion and is secured by crypto guardian BitGo. Wrapped Bitcoin dominates 81 percent of the wrapped token market. The next largest token, renBTC, has a market cap of $672 million. WBTC was created in 2019 by BitGo, Kyber and Ren. Wrapped Bitcoin allows BTC investors to connect their holdings to decentralized finance (DeFi) protocols on Ethereum. This unlocks the potential to transform Bitcoin into a yielding asset that can generate returns from something like liquidity pools in Uniswap or Yearn Finance.
To get Wrapped Bitcoin, you can “wrap” your own BTC by finding a wBTC seller like DeversiFi, Kyber or Ren. These print your Bitcoin in a 1:1 ratio as newly wrapped Bitcoin and send it to a custodian that stores your deposited Bitcoin. When you want to redeem your WBTC for Bitcoin, the seller destroys the wBTC. It makes a burning request to the custodian who will return your Bitcoin to you. This wBTC minting and burning system ensures that there is always exactly one Bitcoin supporting each wBTC in circulation. This is basically similar to the way stablecoins work. Alternatively, you can buy wBTC for other cryptocurrencies on centralized or decentralized exchanges.
What is Wrapped Ethereum?
Wrapped Bitcoin is not the only useful wrapped token. Another prominent wrapped token is wrapped Ethereum (wETH), released by 0x labs in 2017. Unlike wBTC, whose sole purpose is to move Bitcoin to other networks, one of the main purposes of wETH is to trade synthetic ETH directly on the Ethereum Blockchain. This is because wETH converts ETH to an ERC-20 token – a tradable version of ETH that is compatible with decentralized finance protocols. Ethereum’s native token, ETH, does not conform to the ERC-20 standard.
You can think of the Wrapped standards as a set of rules that a token must follow to make sure it is compatible with other Ethereum-based services and platforms. Different token standards are used to create different subsets of assets. Wrapped ETH opens up a whole new world of decentralized finance for ETH holders. With wETH, other Ethereum-based altcoins can be traded directly and DeFi protocols can be funded. Unlike wBTC, you don’t actually “wrap” ETH. To get it, simply trade ETH for wETH via a smart contract or a wallet like MetaMask. The team behind Wrapped ETH hopes that the token will eventually be phased out when Ethereum’s codebase is updated.
What is the purpose of bridges in the world of “wrapped tokens”?
Products like wBTC are not the only way to move assets to different blockchains. Polygon, Arbitrum and Optimism bridges allow you to move assets from Ethereum; allows you to trade on these networks at lower costs and higher speeds. For example, Osmosis’s Gravity bridge allows you to buy and sell ERC-20 wrapped tokens on its Cosmos-based decentralized exchange. Tezos’ Wrap Protocol bridge allows you to move assets to Ethereum.
Major bridges such as the Wormhole bridge support many different Blockchains. For example, Wormhole supports Ethereum, Solana, Terra, Binance Smart Chain and Polygon. Bridge also supports NFTs. So you can move a Solana-based NFT to Ethereum. Niche wrappers like Emblem Vauly create wrappers for all cryptocurrency wallets. Traders used the protocol to convert legacy Bitcoin NFTs minted on Counterparty in 2014 to Ethereum-based NFTs. Ronin Bridge is a specially made bridge for the Axie Infinity NFT game.
According to Dune Analytics, Ethereum bridges have a total assets of $23.24 billion. Polygon, Avalanche and Phantom dominate the market. About $6 billion of assets in bridges are held in wETH, while $5.2 billion is held in USDC. It is thought that bridges could soon conquer the DeFi market. In fact, in the future, perhaps inter-blockchain token trading will become so seamless that we will not realize that a wrapped bridge or token is used.