Interoperability is a speed bump that is hard to overcome in the cryptocurrency industry. In the same way that you cannot install an Android app on an iPhone, different blockchain networks cannot recognize the original assets from other networks. Fortunately, encapsulated crypto tokens offer a simple solution.
Encapsulated crypto-tokens are a creative way to liberalize cross-chain DeFi. By encapsulating cryptocurrency, users can merge Bitcoin (BTC) With dApps in other ecosystems, eg Ethereum blockchain.
How exactly do wrapped icons work? What is the point of using my precious BTC on the Ethereum network?
Most importantly, what are the risks associated with encapsulated tokens?
What are encapsulated cipher codes?
Like tourists dressed as locals on vacation, these digital assets enable users to “wrap” native token into a virtual package. In this way, the encapsulated code can interact with its new environment. This is useful for crypto enthusiasts who want to use their digital assets on-chain in DeFi protocols on different networks.
Wrapped tokens are pegged to the value of their underlying asset. For example, if you roll your original BTC on the Bitcoin blockchain, you will receive an equivalent amount of WBTC on Ethereum or Binance Smart Chain.
- 1 BTC = 1 wBTC
- 1 ETH = 1 wETH
- 1 BNB = 1wBNB
Get an idea?
Although not an official cryptocurrency, stablecoins like Tether (USDT) are, in many ways, the cryptocurrency version of fiat. By offering $1,000 to Tether, you can mint $1,000 USDT.
What are the mechanisms of this process?
How does a bitcoin file (wBTC) work?
Bitcoin wrapped It is the most popular example of how encapsulated crypto assets work. In its simplest description, a wBTC is an ERC-20 token that represents the equivalent value of 1 native BTC on the Bitcoin blockchain.
There are three different types of users within the encapsulated bitcoin ecosystem. Trustees, dealers and clients.
A custodian is like a bank that owns the original BTC assets. After receiving the BTC, the custodian will mint an equivalent amount of WBTC. The custodians take care of the BTC and wBTC assets and ensure they are supported and endorsed on-chain. BitGo It is one of the most popular bitcoin custodians.
The Wrapped Bitcoin DAO (Decentralized Autonomous Organization) decides who will be the trusted custodian of the original Bitcoins.
Wrapped asset dealers organize WBTC distribution. Merchants such as Ren Protocol and Kyber are the medium of exchange between the original Bitcoin blockchain and other networks.
Traders ensure that native BTC always supports WBTC in a 1:1 ratio by exchanging WBTC for BTC depending on customer supply and demand. This ensures that the price of the wrapped bitcoin is pegged to the same price as the BTC.
Clients are regular end users of wBTC and BTC tokens, such as traders and DeFi enthusiasts. It is worth noting that if you want to acquire WBTC, you do not need to order it through the merchant. Decentralized exchanges such as UniSwap’s host liquidity pools you can easily trade with to buy covered assets.
What is the difference between ether (ETH) and encapsulated ether (wETH)
While it is logical that native BTC tokens are not compatible with Ethereum DeFi applications, encapsulated ether is less straightforward. Ironically, the original Ether is different from most tokens on the Ethereum network because the ETH itself is simply for paying gas fees and securing the blockchain.
The ERC-20 token standard is a type of cryptocurrency that can integrate and communicate with smart contracts, such as trading and DeFi staking. Before we can unlock the capital efficiency of ETH, it must be encapsulated in the ERC-20 standard. Token standards are a set of rules and conditions that govern what a token can do on a chain.
Why would I want to encapsulate my cryptocurrency?
Encapsulating your tokens is beneficial because it allows you to do more with cryptocurrency. If you hold ten original bitcoins in a bitcoin wallet, there is not much you can do with those assets on the bitcoin network apart from watching your wallet swing with the market.
However, if you wrap those crypto assets in a digital vault and publish them on a different network, you can borrow for their value on a lending marketplace like AAVE or trade them for buying NFTs on them. open c. The full functionality of the Web3 world at your fingertips.
However, like anything in the cryptocurrency world, there are risks that you must take into account.
- Encapsulated tokens allow you to transfer and store your digital assets across different blockchains.
- You can use tokens like wBTC in DeFi apps to trade, share or borrow for their USD value.
- Almost any digital asset can be encapsulated. For example, XRPPolkaDot and Dogecoin can both be encapsulated and minted on other networks.
- Packaging services are still fairly centralized. If the WBTC custodian collapses unexpectedly, it may be difficult to recover WBTC. If WBTC cannot be exchanged for BTC, it is effectively useless. This could destabilize the peg and reduce the value of WBTC.
- If the blockchain you’ve rolled tokens on suffers an outage, your tokens are stuck until a network restart. last time it was Solana The blockchain has been paused, and millions of dollars in sBTC and USDC have been locked up periodically.
Can traditional stocks be wrapped in cryptocurrency?
In the same way that cryptocurrencies can be encapsulated and deployed on a blockchain, traditional assets such as gold and stocks can also be encapsulated. DeFi apps like Poison Finance support token stocks like Apple, Microsoft, and Tesla on their trading platform.
on the flip side
- While encapsulated tokens give you more benefit for your digital assets, you should be careful about holding your tokens on untrusted networks. After exploiting the Harmony blockchain bridge, such as stablecoins USDC It has lost all value on the Harmony Network and cannot be exchanged for other chains.
Why should you bother
Wrapped assets are useful tools for DeFi enthusiasts and, when used strategically, can help improve yield strategies and unlock deeper liquidity in your crypto holdings.
questions and answers
Can you sell wrapped cryptocurrency?
Yes, you can sell encapsulated cryptocurrencies on decentralized exchanges; Some of the larger tokens, such as wBTC, are also tradable on leading exchanges such as Binance.
Can you mine bitcoin?
Yes, you can cancel a WBTC file by requesting service from a custodian. Alternatively, you can simply sell your wBTC for BTC on a crypto exchange that supports both assets.
Is WBTC as secure as BTC?
While the smart contracts behind WBTC are secure, WBTC itself is at risk of centralized points of failure. For example, if a particular custodian or blockchain crashes, it could affect the value of any tokens wrapped in their ecosystem.
How many wrapped bitcoins are there?
You can check out the latest information regarding the circulating supply and market cap of bitcoin wrappers on sites such as CoinMarketCap and CoinGecko. At the time of this writing, there are those around us 150,000 wBTC coins in circulation.