What Is Wrapped Crypto?
Wrapped crypto is a type of cryptocurrency that has been “wrapped” or tokenized, allowing it to be used on different blockchain platforms.
This type of tokenization, referred to as a “wrapper, " essentially acts as a bridge between various blockchains and tokens, enabling users to move assets from one chain to another without converting them into fiat currency first.
The result of this process is that it allows users to transfer value more quickly and securely than ever before.
Additionally, wrapped crypto can help reduce transaction fees associated with traditional methods of transferring value across blockchains. The technology offers an innovative solution for businesses looking for new ways to facilitate cross-chain transactions in an efficient and cost-effective manner.
Definition of Wrapped Crypto
Wrapped crypto involves transferring other cryptocurrencies onto a different blockchain network. In other words, it allows tokens from one blockchain to be wrapped or converted into another blockchain's token.
It is often stylized with a lowercase “w”. In the case of ETH, wrapped ETH would appear as wETH on Dexes and aggregators.
This process helps enhance liquidity and enables the use of various tokens on one platform. The emerging trend of wrapped crypto is gaining popularity amidst the cryptocurrency community in the wake of the rapid growth of DeFi projects.
It provides an efficient way to combine different blockchain networks and harness the benefits of various digital tokens in a single place. Wrapped crypto has opened up new possibilities and opportunities for investors, making it one of the most exciting developments in the world of blockchain and cryptocurrency.
Benefits of Wrapped Crypto
Wrappers are a hot topic, especially in the defi space. And almost any token can be wrapped.
But what's the point? Below is our complete list of the best reasons to wrap a token and how it can benefit a protocol.
And your wallet.
Increased Liquidity of Tokens
In the world of cryptocurrency, liquidity is paramount. Trading can become difficult without enough liquidity, and prices can skyrocket or plummet without warning.
To combat this, enter the concept of crypto wrappers.
These protocols wrap existing tokens on one blockchain in a new token on another. One of the primary benefits of these wrappers is that they increase the liquidity of the token. By wrapping tokens onto more popular blockchains, crypto wrappers can expose them to a larger audience, thereby increasing demand and liquidity.
Additionally, the ability to trade wrapped tokens on decentralized exchanges also helps improve liquidity by providing a platform for trading without the need for a traditional exchange.
By providing new avenues for trading, crypto wrappers are an innovative solution to increase liquidity in the cryptocurrency world.
Reduced Transaction Costs and Fees
Another benefit of wrapped tokens is that they can save you money on transaction fees. Allowing users to move their assets between blockchains eliminates the need for fiat currency intermediaries and centralized exchanges, resulting in fewer fees associated with transferring value.
Since all transactions occur on-chain, meaning they are recorded on a blockchain ledger, users also no longer have to pay the fees associated with using a third-party provider. As such, wrapped crypto can help reduce transaction costs and fees significantly.
Enhanced Security (In Theory)
Wrapped tokens provide users with enhanced security when it comes to transferring their assets between different blockchains. Since these tokens are tokenized, meaning a cryptographic token represents them, users can be sure that their investments are securely stored.
Since transfers occur on-chain, all transactions are publicly visible and verifiable by anyone accessing the blockchain network. Users can rest assured knowing there’s an extra layer of security. But this also usually comes with an increased smart contract risk.
Enhanced Interoperability Between Different Blockchains
The concept of crypto wrappers can also help improve interoperability between different blockchains. These wrappers create a bridge between different networks by allowing users to move their tokens from one blockchain to another.
This allows developers to build applications and protocols capable of interacting across multiple networks, creating new collaboration and innovation opportunities.
Interoperability is a big deal in the space, and crypto wrappers are an important step toward creating a truly connected blockchain ecosystem.
What Is Interoperability Exactly?
Interoperability is the ability of two or more systems to exchange and understand each other's data in a meaningful way.
It is a crucial component for blockchain networks that allows them to communicate with each other, enabling developers to build applications capable of interacting across different blockchains.
It’s been one of crypto’s biggest problems. In the past, users would have to take their eth, dump it for stables, bridge it, then buy wETH on a different chain. Now you can use a bridge aggregator to go directly from ETH on one chain to wETH on another with minimal fees.
More Access
Finally, crypto wrappers can also give users easier access to multiple tokens from a single platform. By allowing users to trade and store their tokens on one platform, crypto wrappers make managing their digital assets more convenient.
This can be especially useful for investors who want to gain exposure to multiple tokens without jumping between different platforms and exchanges. It can also help users keep track of their portfolios more effectively, allowing them to make better informed decisions when trading.
Greater Flexibility
Wrapped tokens provide users with greater flexibility when transferring value across networks. By allowing users to move their assets between different blockchains, they can take advantage of the unique features offered by each platform and leverage them for their own benefit.
For example, users can buy LSDs, an acronym for liquid staking derivatives. LSDs are a type of receipt token. While not technically a wrapper, they function similarly and can even be wrapped and transferred. One of the best examples is sfrxETH, which you can now find on several blockchains.
Protocols stake tokens with validators on the investor’s behalf and give them a receipt token in return. They can use this token at dexes to LP or lend them on lending protocols and borrow against them to earn extra yield.
Let’s take one of Stader’s LSDs on a quick ride. First, we stake our BNB and receive the BNBx. This token gains in value as the BNB we originally staked with Stader is being staked with a validator.
Then we take our BNBx, split half into THE, and add those funds to the BNBx/THE pool at Thena Finance, where it currently sees triple-digit yields. The possibilities for users to create their own flywheels with these products exist in nearly infinite combinations.
Ability to Offer More Features
They provide developers with greater flexibility when building decentralized finance (DeFi) applications and protocols. By allowing users to move their funds between blockchains, developers can create projects offering more features and functionalities than those native to a single chain.
It enables them to access a larger pool of potential users and investors, making it easier to attract early capital that could have lasting impacts on the blockchain ecosystem.
Efficient Use of Existing Networks
Wrapped tokens also allow users to use existing blockchain networks more efficiently. By reducing the time and resources needed to move funds between different blockchains, users can save money on transaction costs while still taking advantage of the features offered by each platform.
Furthermore, this increased efficiency could help reduce congestion on public blockchains, allowing more users to take advantage of the features offered by these networks.
Potentially Takes Advantage of the Best Features of Different Blockchains
By allowing users to access tokenized assets stored on multiple platforms, developers can create applications and protocols that offer enhanced security, scalability, and interoperability.
Hybrid tokens could provide users with new opportunities for collaboration and innovation, while also allowing developers to create projects that offer more features and functionalities than those native to a single chain.
Increase Investor Confidence
LSDs are a prime example of how crypto wrappers could potentially increase investor confidence in the cryptocurrency markets.
In addition, it could also provide a bridge between traditional finance and the blockchain space by making it easier for investors to access tokenized assets stored on multiple platforms.
This could open up new opportunities for collaboration and innovation within the blockchain ecosystem and help further drive cryptocurrency technology adoption.
How Does Wrapped Crypto Work?
The process of wrapping crypto is fairly simple and can be done in a few steps. First, users must find a reputable platform that offers the service. Once they’ve found one, users can deposit their tokens onto the platform and have them converted into wrapped tokens.
The protocol will then issue the user with a tokenized version of their original asset. Finally, users can transfer the new tokenized assets across different networks or exchange them for other tokens on decentralized exchanges (DEX).
Advantages of Using Wrapped Crypto
One of the most notable advantages is the ability to easily trade between different cryptocurrencies without leaving the wrapped ecosystem. The best-known case is wBTC. You didn’t think you were buying real Bitcoin on Coinbase, did you?
Wrappers also allow for the use of smart contracts on various blockchains, providing users with more flexibility and utility.
Another significant advantage of wrapped crypto is increased interconnectivity between blockchains, potentially leading to improved scalability and lower transaction fees.
Overall, the growing adoption of wrapped crypto points towards a future where digital assets are more easily accessible and functional than ever before.
Challenges with Wrapped Crypto
One of the main challenges with wrapped crypto is finding a reliable platform to use. As the technology is still relatively new, not all platforms offer this service, and users should always do their research before transferring funds.
Many protocols offering wrappers have been exploited. Make sure to do your DD on these projects. Exploits and hacks happen, so what’s most important is to see how they recovered and how they went about making their users whole.
Some platforms may require users to pay additional fees for tokens or services, which could add up over time.
Conclusion
Wrapped crypto is valuable tech allowing users to transfer funds between blockchains and access tokenized assets stored on multiple platforms.
It can give users greater flexibility when trading and more options when moving their funds while also allowing developers to create projects that offer enhanced security, scalability, and interoperability.
Although some challenges come with wrapped crypto, such as finding reliable platforms and additional fees, the potential benefits outweigh these drawbacks.
Ultimately, this technology could increase investor confidence, provide an additional yield to users, and help maintain blockchains' decentralization and security.