What are wrapped tokens?
A wrapped token is a digital asset that is pegged to the value of another cryptocurrency on a different blockchain. It allows you to use your Bitcoin on the Ethereum blockchain. A wrapped Bitcoin (wBTC) on the Ethereum blockchain mirrors the value of a Bitcoin. You can mint a new token on a different blockchain after securing the original asset in a digital vault.
For instance, when you travel to a new country, it is very common to go to a money exchanger and get some of the local currency, as the currency you carry from your home country might not be accepted in the visiting country. So when you give the currency you got from your country, you will get the visiting country’s local currency, which matches the value, don’t you? The same happens with token wrapping. This method of token wrapping was introduced to overcome the problem of interoperability between two different blockchains.
Benefits of wrapped tokens
DeFi participation
The wrapped tokens can be used for lending and borrowing from the platform. The token could be used for staking, and users can earn extra tokens as yield rewards.
Liquidity sharing
When users from different chains lock their tokens to transact on other chains, there will be increased liquidity, which smoothens lending and borrowing.
Interoperability
As mentioned in the above paragraphs, the wrapped token enhances interoperability, or bridges the gap between two independent chains, enabling tokens to be used on a non-native chain.
Cross-chain use
Wrapped tokens can be used for making cross-chain payments. They can be used to trade assets from multiple blockchains on a single DEX, expanding trading options.
