What are Wrapped Tokens?

What are Wrapped Tokens

Content provided by various contributors. DYOR.

Wrapped tokens represent ownership of a corresponding asset on a different blockchain. The idea behind wrapped tokens is to allow the use of assets from one blockchain on a different blockchain. This is accomplished by creating a digital asset on the destination blockchain backed by an equivalent amount of the original asset on the source blockchain.

For example, consider a wrapped WETH, which represents ownership of ETH (Ethereum) on the Ethereum blockchain. The value of WETH is equivalent to the value of the underlying ETH it represents. To create a WETH token, an individual would need to send an equivalent amount of ETH to a smart contract on the Ethereum blockchain, which would then mint a corresponding amount of WETH. The individual would then be able to use the WETH on other Ethereum-compatible blockchain platforms.

To unwrap a WETH token back to ETH, the owner would use the same smart contract, the process is known as “unwrapping,” where the WETH token would be burned, and the corresponding amount of ETH would be sent back to the owner.

Wrapped tokens are created to increase the interoperability of different blockchains, which allows for greater liquidity and ease of use for different digital assets across multiple platforms. It also allows the creation of a decentralized exchange and uses it as collateral for different financial applications.

The wrapped token can be minted for any token; for instance, one can find wrapped versions of Bitcoin, Litecoin, and more.

Wrapped Tokens Risks

Bitcoin live price
price change

Like any other digital asset, wrapped tokens come with certain risks. Some of the key risks to be aware of include the following:

  1. Counterparty risk: Wrapped tokens are created and maintained by a smart contract, which an individual or group of individuals controls. There is a risk that the smart contract may be hacked or that the individuals controlling the contract may not be trustworthy. This could result in the loss of your wrapped tokens.
  2. Smart contract risk: Smart contracts are self-executing code, which may contain bugs or vulnerabilities that hackers could exploit. This could also result in the loss of your wrapped tokens.
  3. Liquidity risk: Wrapped tokens are often used to increase the liquidity of assets across different blockchain platforms. However, if there is a low demand for a particular wrapped token, it may be difficult to sell or trade.
  4. Volatility: Wrapped tokens are often highly volatile. Their value can change rapidly and unpredictably. This can make it difficult to manage the risk associated with holding them.
  5. Regulatory Risk: It is important to consider the laws and regulations of your country; wrapped tokens may be considered securities or illegal in certain jurisdictions.
Read more from author

Editor's picks

An Overview of Different Cryptocurrency Scams

Cryptocurrency scams are fraudulent schemes that are becoming increasingly common as the popularity of cryptocurrencies continues to grow. They can take many forms and are often designed to appear legitimate investment opportunities or exchanges. Unfortunately, these scams can cause significant financial losses for individuals and harm the reputation of the cryptocurrency industry as a whole. It is crucial for anyone considering investing in cryptocurrencies to be aware of the various types of scams and to take steps to protect themselves.…

What Are Crypto Data Aggregators?

Crypto data aggregators gather data from multiple sources to provide comprehensive and real-time information about the cryptocurrency market. They pull data from various exchanges, trading platforms, and other sources to centralize the information and present it in a user-friendly format. The data includes cryptocurrency prices, trading volume, market capitalization, news, and other relevant information. Crypto data aggregators use algorithms to clean, process, and normalize the data to ensure accuracy and consistency across multiple sources. The information is then presented in…

What Is CoinGecko?

CoinGecko is a cryptocurrency data aggregator and tracking platform. It provides information and insights on the cryptocurrency market, including price, volume, trading activity, developer activity, and community growth. How CoinGecko Works Data Aggregation: CoinGecko collects crypto data from various cryptocurrency exchanges, wallets, and blockchains to create a comprehensive database of cryptocurrency information. Calculation of Metrics: CoinGecko calculates several metrics, such as market capitalization, trading volume, liquidity, and community growth, to provide a comprehensive overview of the cryptocurrency market. Display of…

What Is CoinMarketCap (CMC)?

CoinMarketCap (CMC) is a website that provides information about the cryptocurrency market and tracks the capitalization of various cryptocurrencies. It was founded in 2013 and has become one of the most popular cryptocurrency data providers. CMC aggregates information about the prices, volume, and market capitalization of cryptocurrencies from various exchanges and calculates the average value. Furthermore, the website displays this information in real-time, giving users a comprehensive overview of the cryptocurrency market. CMC tracks over 22,000 cryptocurrencies, including Bitcoin, Ethereum,…

What Are Crypto Pyramid Schemes?

A crypto pyramid scheme is a fraudulent investment scheme where returns are paid to existing investors from funds contributed by new investors. It's called a "pyramid" because it typically has many new entrants at the bottom, with each layer representing fewer investors. Example: John starts a pyramid scheme and invites five friends to invest 1 Bitcoin each. John promises to return 2 Bitcoins to each participant in a month. John needs 10 Bitcoins to fulfill his promise, so he invites…

What Is a SAFE (Simple Agreements for Future Equity) in Crypto?

Simple Agreements for Future Equity (SAFE) is a financing instrument used in the crypto and start-up communities to secure early-stage funding without giving up ownership or control. A SAFE is a contract between a startup and an investor that promises the investor a certain amount of equity in the company in the future in exchange for a direct cash investment. The terms of the SAFE, including the valuation of the company and the equity to be received, are agreed upon…

What Are Crypto Institutional Investors?

Crypto institutional investors are large financial institutions that invest in cryptocurrencies, such as Bitcoin and Ethereum. They play a crucial role in providing stability and growth to the crypto market, helping to bring more mainstream recognition to cryptocurrencies as a legitimate asset class. Crypto institutional investors typically comprise large investment banks, hedge funds, pension funds, and endowments. They bring significant resources and investment expertise to the crypto market, providing the liquidity and capital required for the market to grow and…

What Is Automated Crypto Trading?

Automated Crypto Trading is a type of trading that uses software programs to automate the buying and selling of cryptocurrencies on the market. It uses algorithms to analyze market data and execute trades based on predefined strategies. The software can be programmed to scan the market and make trades based on specific conditions, such as price changes or trends. It also allows for backtesting and optimization of trading strategies. In addition, the trades are executed automatically, reducing the need for…

What is Genesis Mining in Metaverse?

Genesis mining in the metaverse refers to the initial creation and distribution of virtual assets within a virtual world or metaverse, such as virtual real estate or virtual currency. The creators or developers of the metaverse often control this process. It may involve using blockchain technology to ensure the security and integrity of virtual assets. The term "genesis mining" describes the initial creation and distribution of these assets, similar to mining for precious metals or other resources in the physical…