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What Are Wrapped Cryptocurrencies?

You can take a cryptocurrency from one blockchain and “wrap” it on another chain, which opens up new frontiers for bitcoin and other cryptos.

By Cryptopedia Staff

Updated October 4, 20233 min read

What Are Wrapped Cryptocurrencies -100

Summary

Wrapped cryptocurrencies enable crypto assets to be used on blockchains to which they are not native. This interoperability hack has brought bitcoin (BTC) and other popular cryptocurrencies to smart contract platforms, including the Ethereum ecosystem. Wrapped cryptocurrencies increase the utility and liquidity of smart contract platforms and popular decentralized finance (DeFi) applications. Other reasons to wrap cryptocurrencies may include ERC-20 token swapping or taking advantage of blockchain functions that a crypto asset might not have on its native chain.

Wrapped Cryptos and DeFi Interoperability

Interoperability, or the capacity of different blockchain protocols to interact and exchange value with each other, has long been a priority in the cryptocurrency space. However, the need for interoperability solutions has become more urgent with the rise of Ethereum’s decentralized finance (DeFi) movement, as the community clamors to put non-Ethereum-based assets to work in DeFi protocols.

One emerging solution to such DeFi-related interoperability challenges comes with wrapped cryptocurrencies: tokens that are 1:1 representations of other crypto assets, such as bitcoin (BTC). Wrapped cryptocurrencies track the value of the asset they represent and can often be redeemed for that asset. They usually take the form of an ERC-20 token or other smart contract platform token. Therefore, they can be used within a smart contract platform ecosystem (such as Ethereum), and can be exchanged for other tokens within that ecosystem.

In short, wrapped cryptocurrencies have the effect of allowing crypto assets to be used on non-native blockchains. This means, for example, that bitcoin in its wrapped form can be used to interact with Ethereum’s ecosystem of decentralized applications (dApps) and smart contracts, or as collateral for a loan on MakerDAO — all of which might have been difficult or impossible given the fundamental structural differences between the Ethereum and Bitcoin networks. Tokenizing bitcoin as an ERC-20 token allows the Ethereum ecosystem to benefit more fully from bitcoin’s liquidity.

Wrapped Bitcoin (wBTC) vs. Bitcoin (BTC)

Several tokenized representations of bitcoin exist. Wrapped bitcoin (wBTC or WBTC), jointly created by Bitgo, Kyber, and Ren, was launched in 2019. To obtain wBTC, you must request the tokens from a merchant, such as Kyber, DeversiFi, or Airswap, who will then carry out Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) checks to verify your identity. The merchant then initiates a transaction with a custodian, who mints wBTC tokens and sends them to the merchant. Next, you swap your bitcoin for wBTC with the merchant via a centralized exchange (CEX), decentralized exchange (DEX), or atomic swap. Only merchants can redeem wBTC for BTC.

Crypto exchange Huobi Global launched its own version of wrapped bitcoin, Huobi BTC (HBTC), in 2020. Every HBTC is backed by one BTC. You can obtain HBTC by first depositing BTC into your Huobi Global exchange account and then withdrawing HBTC. You can redeem your BTC by depositing your HBTC into your account and withdrawing BTC. This system contrasts with that of wBTC, which (as mentioned above) is redeemable only by merchants. However, both wBTC and HBTC are fairly centralized systems for wrapping bitcoin.

Ren, launched in 2020, offers a more decentralized alternative to wBTC and HBTC with its renBTC. To obtain renBTC, you must send bitcoin to Ren’s protocol, which will lock it up in a smart contract. The protocol then verifies the details of the transaction and returns a minting signature, which allows you to mint renBTC, an ERC-20 token representing bitcoin. Ren also lets you burn your renBTC to redeem the bitcoin you locked up.

There are a variety of other wrapped bitcoin tokens in addition to those mentioned above, including:

At another layer of abstraction, PieDAO’s BTC++, ACoconut’s acBTC, and mStable’s mBTC are all backed by a basket of ERC-20 token representations of bitcoin. In other words, they are backed by multiple wrapped versions of bitcoin. For example, acBTC is backed by sBTC, wBTC, pBTC, and imBTC.

Wrapped Ether (wETH)

Even though ether (ETH) is the native currency of the Ethereum blockchain, it is not compatible with Ethereum’s ERC-20 tokens. Therefore, you cannot directly trade ETH for ERC-20 tokens without using a trusted third party, such as a centralized exchange.

To solve this problem, a collection of Ethereum projects led by 0x Labs created an ERC-20 compliant token called wrapped ether (wETH or WETH). To create wETH, you send ETH to a smart contract to lock it up. The smart contract then returns wETH tokens at a 1:1 ratio. To redeem your locked ETH, you can send the wETH back to the smart contract. A variety of platforms facilitate this process, including Relay and Airswap.

Other Wrapped Cryptocurrencies:

Bitcoin and ether are not the only wrapped cryptocurrencies. For example, Ren supports wrapped versions of many popular cryptocurrencies:

Additional wrapped versions of popular cryptocurrencies include:

While wrapped cryptocurrencies have thrived on Ethereum, many other projects have sought to benefit from this new interoperability solution. Binance Smart Chain (BSC), which has become increasingly popular with DeFi applications, also allows you to wrap crypto assets. For example, here are some of the popular cryptocurrencies and their Binance-wrapped equivalents:

Wrapped cryptocurrencies have improved liquidity and supercharged the cross-chain flow of assets, particularly benefitting Ethereum’s DeFi ecosystem. These assets have enhanced the much-needed interconnection between the blockchain community’s many ecosystems, making new forms of composability and collaboration possible.

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