For example, Basic Attention Token (BAT) and OmiseGO (OMG) are ERC-20 tokens. A quick recap – ETH (ether) is required to pay for transactions on the Ethereum network, while ERC-20 is a technical standard for issuing tokens on Ethereum. We wrote about them in more detail in our tokenized Bitcoin article.Īn interesting example of a wrapped token on Ethereum is wrapped ether (WETH). The implementations of these tokens can be very different. As you’d expect, wrapping and unwrapping tokens on Ethereum costs gas. This means that you can use assets that are not native to Ethereum on Ethereum. Wrapped tokens on Ethereum are tokens from other blockchains that are made to be compliant with the ERC-20 standard. Each USDT token acts as a kind of wrapped version of a fiat USD.

Instead, this reserve is made up of cash and other real-world cash equivalents, assets, and receivables from loans. While USDT generally trades one-for-one with USD, Tether does not hold the exact amount of physical USD for each USDT circulating in their reserves. While some in the community may refer to Tether (USDT) as a wrapped token, this isn’t exactly the case. In WBTC’s case, adding and removing custodians and merchants is performed by a DAO. You can think of the custodian as the wrapper and unwrapper. When the WBTC needs to be exchanged back to BTC, the merchant puts in a burn request to the custodian, and the BTC is released from the reserves. The custodian then mints WBTC on Ethereum according to the amount of BTC sent. Proof of this reserve exists on-chain.īut how does the wrapping process work? A merchant sends BTC for the custodian to mint. So, in WBTC’s case, the custodian needs to hold 1 BTC for each 1 WBTC that is minted. This custodian can be a merchant, a multisig wallet, a DAO, or even a smart contract. Wrapped tokens typically require a custodian – an entity that holds an equivalent amount of the asset as the wrapped amount. WBTC is an ERC-20 token that’s supposed to hold a one-to-one peg to the value of Bitcoin, allowing you to effectively use BTC on the Ethereum network. Let’s use Wrapped Bitcoin (WBTC) as our example, a tokenized version of Bitcoin on Ethereum. For example, this is the WBTC/BTC market on Binance. It’s worth noting that if you’re an ordinary user, you don’t have to worry about the wrapping and unwrapping process you can just trade these wrapped tokens like any other cryptocurrency. Wrapped tokens increase interoperability between different blockchains – the underlying tokens can, in essence, go cross-chain. In a wrapped token’s case, it’s usually an asset natively living on another blockchain.Īs blockchains are distinct systems, there isn’t a good way to move information between them. In a stablecoin's case, that’s usually fiat currency.

You could think of a wrapped token as being similar to a stablecoin in that it derives its value from another asset. It usually represents an asset that doesn’t natively live on the blockchain that it’s issued on. It’s pegged to the value of the asset it represents and typically can be redeemed for it (unwrapped) at any point. Wrapped tokens are a way to circumvent this limitation and use non-native assets on a blockchain.Ī wrapped token is a tokenized version of another cryptocurrency.

IntroductionĮver found it frustrating that you can’t use BTC on Ethereum? ETH on BNB Smart Chain (BSC)? Coins that exist on a given blockchain can’t be simply transferred to another. However, with wrapped tokens, there can be more bridges between different blockchains. The Bitcoin blockchain doesn’t know what’s happening on the Ethereum blockchain. What’s the point? Well, different blockchains offer different functionality. It’s called a wrapped token because the original asset is put in a wrapper, a kind of digital vault that allows the wrapped version to be created on another blockchain. A wrapped token is a cryptocurrency token pegged to the value of another crypto.

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