Table of contents 1.
What Is wrapped token? 2.
What are the similarities and differences between it and stablecoins? 3.
how does the wrapping process work? 4.
Does all Wrapped tokens on ETH? 5.
Limitations of wrapped tokensWhat Is wrapped token?It is a token pegged to the value of another crypto by putting the original asset into digital vault called wrapper that allows the wrapped version to be created on another blockchain.
What is the reason for the complexity? The main reason is that the different blockchains cannot talk to each other. Thus the Bitcoin blockchain does not know what is happening on the Ethereum blockchain.
What are the similarities and differences between it and stablecoins?The similarity is that it derives its value from another origin. For example, stablecoins derive their value from paper money, which is similar to it. In the case of wrapped token, it is usually an asset that originally lives on another blockchain.
As for the difference, it is how to keep and give the value, since in stablecoins it is claimed that there is a dollar in the bank therefore you need to trust them. Wrapped tokens typically require a custodian that can be a multisig wallet o a smart contract. So, in WBTC's case, the custodian needs to hold 1 BTC for each 1 WBTC that is minted. Proof of this reserve exists on-chain.
how does the wrapping process work?A merchant sends BTC for the custodian to mint. The custodian then mints WBTC on Ethereum according to the amount of BTC sent. 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.
Does all Wrapped tokens on ETH?No, you can have Wrapped tokenson other chains like BSC.
Limitations of wrapped tokensrequires a custodian, to hold the tokens in the vault, so it’s not really decentralized.
Fees for wrapping tokens are also quite high
https://cryptoarena.org/wrapped-tokens/
