Wrapped tokens are a way to use cryptocurrencies such as Bitcoin or Dogecoin on blockchains other than the blockchain they were originally built on.
Wrapped tokens are backed 1:1 by their underlying asset, which is stored in a digital vault.
Wrapped tokens are a solution to the problem of blockchain interoperability.
One way to understand blockchains such as Bitcoin and Ethereum is as separate distributed databases. As blockchains are separate, they can’t communicate easily with each other.
You can’t use your Bitcoin directly on the Ethereum blockchain, because only the Bitcoin blockchain “knows” that you hold Bitcoin.
Wrapped tokens were created as a solution to this problem. With wrapped tokens, you can effectively move assets between blockchains and use them across the crypto ecosystem.
What are wrapped tokens?
Wrapped tokens are assets that allow the value of a native asset from one blockchain to transfer to another blockchain. One of the best-known wrapped tokens is Wrapped Bitcoin (WBTC). WBTC is pegged 1:1 to the price of Bitcoin (BTC), so that one WBTC should always equal one BTC. But unlike BTC, WBTC is available as ERC-20 or TRC-20 tokens, which means it can be used and traded on the Ethereum and Tron blockchains.
In a way, wrapped tokens are similar to stablecoins such as USDT, which follow the price of the U.S. dollar. Just as one WBTC is pegged to the price of one BTC, one USDT is pegged to the price of $1.
What makes a wrapped token a wrapped token, though, is not just whether it is pegged 1:1 to the price of another asset. It’s the…