Wrapped cryptocurrencies allow crypto assets to be used on non-native blockchains, improving their interoerability.
Wrapped crypto tokens are classified as redeemable and cash-settled
Photo Credit: Unsplash/ Kanchanara
The cryptocurrency sector stands at a trillion-dollar valuation as of Tuesday, and is expected to reach its full potential over the coming years as more countries experiment with digital assets under regulatory frameworks. In the meantime, developers have been creating tools to align with digital assets, that would scale their usability in the long run and allow them to be used on a wider basis. Wrapped crypto assets are among these crypto tools that enable interoperability of crypto assets across different blockchains.
Wrapped cryptocurrencies allow crypto assets to be used on those blockchains that these assets are not native to.
The most popular wrapped crypto asset as of today is Wrapped Bitcoin (wBTC). It allows Bitcoin to be used on the Ethereum blockchain.
For Bitcoin holders, this eliminates the process of converting their BTC tokens into ETH before utilising their investments on activities supported on the Ethereum blockchain.
Currently, 176,197 wBTC tokens are in circulation, with each priced the same as Bitcoin — $21,768 (roughly Rs. 17.9 lakh), as per the latest CoinMarketCap statistics.
Wrapped cryptocurrencies are pegged to the value of other original cryptocurrency or reserve assets like gold or stocks. These crypto tokens are classified in redeemable and cash-settled categories. As their names suggest, redeemable wrapped tokens can be exchanged to get back the underlaying asset whereas cash-settled tokens cannot be exchanged for the underlaying asset.
Crypto holders can enter into smart contracts to ‘wrap' these assets or even use merchants like Kyber and DeversiFi to do so.
The holders of wrapped cryptocurrencies can unlock their original assets by trading their holdings back into the smart contract. Wrapped tokens increase liquidity and capital efficiency for both centralised and decentralised exchanges.
However, it is worth noting that wrapping and unwrapping cryptocurrencies means that these assets will be subject to the security features of the blockchain it is transitioned to. The new blockchain might not offer the same level of security as the original one, and the wrapped asset could be more vulnerable during the time it is traded on that blockchain.
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