Many users in the crypto arena are wondering about how Bitcoin can be used on Ethereum or Blockchain Binance, knowing that each blockchain is different from the other, and “A” currency cannot work on Blockchain “B because the programming language, the method of work and the verification mechanism are different ...
Wrapped tokens are a way to circumvent these restrictions and use non-native digital currencies on a blockchain.
What are "Wrapped Tokens"?
The encapsulated token is a token version of another cryptocurrency that operates on a network other than its blockchain.
This encapsulated symbol is linked to the value of the asset it represents, and the original (unpacked) symbol can usually be redeemed at any time.
An encapsulated digital currency usually represents an asset that does not originally survive on the blockchain in which it was issued.
You can think of an encapsulated token as being analogous to a stable currency in that it derives its value from another asset.
In the case of stablecoin, the asset is usually fiat currency.
Since blockchains are distinct systems, there is no good way to transfer information between them.
Encapsulated tokens increase the interoperability between different blockchain networks.
It is worth noting that if you are a regular user, you do not have to worry about the wrapping and unpacking process, as you can only trade these encapsulated digital tokens like any other cryptocurrency.
For example, Bitcoin encapsulated on Ethereum, symbolized by wBTC, can be traded against either Tether or Bitcoin on any trading platform that supports it.
How do encapsulated icons work?
Let's use “Wrapped Bitcoin” (WBTC) as an example.
As indicated, the encapsulated token wBTC is based on Ethereum and in the ERC-20 standard, 1 wBTC is assumed to equal 1 Bitcoin.
Thus, the wBTC cryptocurrency can move comfortably on the Ethereum blockchain and be used in decentralized financing protocols as normal as any other Ethereum-based digital currency.
Encapsulated cryptocurrencies usually require a custodian, which is an entity that holds an equivalent amount of the asset as an encapsulated amount.
A custodian can be a trading platform, a multi-signature wallet, a DAO, or even a smart contract.
In the case of a WBTC, the trustee needs to hold 1 BTC for every 1 WBTC minted.
But how does the packaging process work?
Here is the answer:
The merchant sends the bitcoin to the custodian.
The trustee then mints the WBTC on Ethereum according to the amount of Bitcoin sent.
When the WBTC needs to be redeemed back to bitcoin, the trader submits a burn request to the trustee, and the bitcoin is released from the reserve.
You can think of a guardian as the one wrapping and removing the wrapper.
In the case of WBTC, the addition and removal is performed by DAO.
While some in the community may refer to "USDT" as an encapsulated symbol, this is not entirely correct.
While the USDT generally trades 1 to 1 USD, Tether does not keep the exact amount of the actual US dollar for every USDT it trades in its reserves.
Instead, this reserve consists of cash and other cash equivalents in the real world, assets and amounts due from loans.
However, the idea is very similar.
Each USDT symbol acts as a kind of encapsulated version of the USD fiat currency.
Symbols encapsulated on Ethereum:
Tokens encapsulated on Ethereum are tokens from other blockchain networks designed to be ERC-20 compliant.
This means that you can use assets that are not native to Ethereum over Ethereum.
It is worth noting that encapsulating and decoding the tokens in Ethereum costs the gas.
Applications of these encapsulated icons can be very different from one another.
An example of these encapsulated digital currencies is WETH which is a symbol encapsulated on Ethereum.
You may wonder and say what is the benefit of this symbol, especially as it exists in the original Ethereum coin.
Well, WETH is a digital currency built according to the ERC-20 standard, unlike the original digital currency.
Ethereum is the original payment currency for transactions on the Ethereum network, while ERC-20 is a technical standard for issuing tokens on Ethereum.
For example, there are several symbols built according to the ERC-20 standard such as:
"BAT" and "OmiseGO".
However, since the original ETH tokens was developed before the ERC-20 standard, it is not compatible with it.
This creates a problem, as many DApps require conversion between Ethereum and the ERC-20 token.
This is the reason for the creation of Encapsulated Ethereum (WETH), which is an encapsulated version of Ethereum compliant with the ERC-20 standard.
Tokens encapsulated on BSC:
Just like tokens encapsulated on Ethereum, Bitcoin and many other cryptocurrencies can be encapsulated for use in Blockchain Binance (BSC).
The Binance Bridge allows any digital currency (BTC, ETH, XRP, USDT, BCH, DOT, etc.) to be wrapped and encapsulated to be used in the Binance Smart Chain blockchain in the form of BEP-20 tokens.
Once the cryptocurrencies are brought into the BSC blockchain, they can be traded or used in the various applications provided by the blockchain Binance.
The encapsulation process for Blockchain Binance also requires fees but is less than Ethereum.
Benefits of using encapsulated icons:
Although many blockchain networks have their own token standards (ERC-20 for Ethereum or BEP-20 for BSC), these standards cannot be used across other blockchain networks.
Encapsulated tokens allow non-native tokens to be used on a specific blockchain.
Encapsulated tokens can increase liquidity and capital efficiency for both centralized and decentralized trading platforms.
The ability to encapsulate idle assets and use them in another blockchain network could also create further connections between isolated liquidity.
Finally, there is a huge benefit in transaction and fee times.
Although Bitcoin has some great properties, it is not the fastest and it can be very expensive at times.
While this is good for what it really is, it can cause some annoyance at times.
These issues can be mitigated by using an encapsulated token issuance on a blockchain that has faster transaction times and lower fees.
Limitations for using encapsulated icons:
Most of the current applications of encapsulated tokens require trust in the custodian who holds the funds.
As for the technology currently available, encapsulated tokens cannot be used for real transactions via the blockchain, as they usually need to be passed through a custodian.
However, some decentralized options are in the works and may be available in the near future for automated, reliable encapsulated coining and retrieval.
Minting can also be relatively expensive due to high gas fees and cause some slippage.
In conclusion:
Encapsulated tokens help create more bridges between the different blockchains.
Encapsulated token is a symbolic form of an asset that originally lived on another blockchain.
This encapsulated token helps interoperability in the cryptocurrency and decentralized finance (DeFi) ecosystem.
Encapsulated tokens open a world where capital is more efficient, and applications can easily share cash with each other.
This was a brief overview of encapsulated digital codes and their uses.