How are Wrapped Tokens created?

Wrapped tokens are created through a process called token wrapping, which involves locking up the underlying asset and issuing a corresponding wrapped token that represents it. The process of creating wrapped tokens typically involves several steps, including custodianship, minting, and redemption.

1. Custodianship
   The first step in creating a wrapped token is to choose a custodian who will hold the underlying asset. The custodian is responsible for securing the asset and ensuring that it is safe from theft or loss. Custodians are typically centralized entities, such as exchanges or custodial services, that are trusted to hold large amounts of cryptocurrency.

2. Minting
   Once a custodian has been selected, the next step is to mint the wrapped token. Minting involves locking up the underlying asset and issuing a corresponding wrapped token that represents it. This is typically done through a smart contract on the blockchain network where the wrapped token will be used.
   For example, to mint Wrapped Bitcoin (WBTC), a user would send their Bitcoin to the custodian, who would hold the Bitcoin in custody. The user would then receive an equivalent amount of WBTC, which they can use on the Ethereum network.

3. Redemption
   Redemption is the process of exchanging the wrapped token for the underlying asset. This is typically done through the custodian, who is responsible for releasing the underlying asset when the wrapped token is redeemed.
   For example, if a user wants to redeem their WBTC for Bitcoin, they would send their WBTC to the custodian, who would release the underlying Bitcoin to the user.

4. Multi-signature wallets
   Multi-signature wallets are also utilized in the creation of wrapped tokens to enhance security and reduce counterparty risk. These wallets require multiple signatures or approvals from designated parties, ensuring a decentralized and trustless approach. The use of multi-signature wallets adds an extra layer of protection to the wrapped token ecosystem by requiring consensus among the authorized participants for token minting, burning, or other governance actions.

5. Chain-hopping
   Chain-hopping is another method used in the creation of wrapped tokens. It involves the movement of assets between different blockchain networks using bridges or interoperability protocols. Through chain-hopping, the underlying asset is transferred from its native blockchain to another blockchain where it can be wrapped into an equivalent token. This allows for the seamless transfer of value across different chains, expanding the reach and usability of the wrapped token.

Governance plays a crucial role in the creation and management of wrapped tokens. Governance frameworks are implemented to make decisions regarding collateralization ratios, adjustments to token supply, and other important parameters. Participants in the wrapped token ecosystem can participate in governance processes through voting or staking mechanisms, ensuring community involvement and consensus-based decision-making.

Key Factors in Token wrapping process

• Audit and Verification
  To ensure that the wrapped token is fully backed by the underlying asset, regular audits and verifications are conducted. These audits are typically done by third-party auditors, who verify that the custodian is holding the underlying asset in custody and that the number of wrapped tokens in circulation is equal to the number of underlying assets held in custody.

• Collateralization Ratio
  To ensure that the wrapped token maintains a 1:1 peg to the underlying asset, a collateralization ratio is set. The collateralization ratio is the ratio of the underlying asset held in custody to the number of wrapped tokens in circulation. For example, if the collateralization ratio is set at 1:1, then for every wrapped token in circulation, there is an equivalent amount of the underlying asset held in custody.

• Multi-Signature Wallets
  To ensure that the underlying asset is safe from theft or loss, multi-signature wallets are often used. Multi-signature wallets require multiple signatures before a transaction can be executed, which ensures that no single party can access the underlying asset without the approval of all parties involved.

• Chain-Hopping
  Chain-hopping is the process of moving wrapped tokens between different blockchain networks. This is done to enable cross-chain interoperability, which allows users to access different blockchain networks without having to go through the process of buying and selling assets.

For example, if a user wants to move their Wrapped Bitcoin from the Ethereum network to the Binance Smart Chain, they would send their WBTC to a multi-chain bridge, which would convert the WBTC into an equivalent amount of Wrapped Bitcoin on the Binance Smart Chain.

• Token Standard
  To ensure compatibility between different wrapped tokens, a token standard is often used. The most commonly used token standard for wrapped tokens is the ERC-20 standard, which is used on the Ethereum network.

Examples of Wrapped Tokens

Wrapped tokens can be created for a variety of different cryptocurrencies and can be used on different blockchain networks. Some of the most common types of wrapped tokens include:

Wrapped Bitcoin (WBTC)

Wrapped Bitcoin is a tokenized version of Bitcoin that can be used on the Ethereum network. WBTC is the most popular wrapped token and is used extensively in the decentralized finance (DeFi) ecosystem.

Wrapped Bitcoin (WBTC) was created through a collaborative effort between various entities. The process involves users depositing Bitcoin into a custodian’s wallet, and in return, receiving an equivalent amount of WBTC tokens. These tokens are ERC-20 compliant and are minted by the custodians, who hold the Bitcoin reserves. The custodians are responsible for maintaining the 1:1 peg between WBTC and Bitcoin, ensuring that the value of WBTC always reflects the underlying Bitcoin holdings. The custodians undergo regular audits to provide transparency and assurance to the users. This collaborative approach involving custodians and the token minting process allows WBTC to bridge the gap between Bitcoin and the Ethereum blockchain, enabling users to access the benefits of both ecosystems.

Wrapped Ethereum (WETH)

Wrapped Ethereum is a tokenized version of Ether that can be used on the Ethereum network. WETH is used to enable trading and liquidity provision on decentralized exchanges (DEXs) and is a critical component of the DeFi ecosystem.

Wrapped Ethereum (WETH) is created through a process called wrapping, which involves users depositing Ether into a smart contract. In return, an equivalent amount of WETH is minted and issued to the user’s Ethereum address. The wrapping process converts Ether into an ERC-20 compliant token, allowing it to be easily used in decentralized applications and smart contracts on the Ethereum blockchain. WETH provides users with improved liquidity and compatibility within the Ethereum DeFi ecosystem, as it can be seamlessly traded on decentralized exchanges and utilized in various DeFi protocols. The wrapping and unwrapping of WETH can be performed by interacting with the smart contract, providing users with the flexibility to convert between WETH and Ether as needed.

Wrapped Litecoin (WLTC)

Wrapped Litecoin is a tokenized version of Litecoin that can be used on the Ethereum network. Like WBTC and WETH, WLTC is used to enable cross-chain interoperability and is an important component of the DeFi ecosystem.

WLTC, or Wrapped Litecoin, is created through a similar process as WBTC and WETH. Users deposit Litecoin into a custodian’s wallet and receive an equivalent amount of WLTC tokens in return. These tokens are ERC-20 compliant and represent the value of Litecoin on the Ethereum blockchain. The custodians ensure a 1:1 peg between WLTC and Litecoin, allowing users to access the Ethereum ecosystem while maintaining exposure to the value of Litecoin.

Wrapped Zcash (WZEC)

Wrapped Zcash is a tokenized version of Zcash that can be used on the Ethereum network. WZEC is used to enable private transactions on the Ethereum network and is an important component of the privacy-focused DeFi ecosystem.

WZEC, or Wrapped Zcash, is created by depositing Zcash into a shielded pool, where it is converted into an equivalent amount of ZEC tokens on the Ethereum blockchain. This wrapping process is facilitated by the Zcash community and other participants in the ecosystem, enabling users to use ZEC in decentralized applications and benefit from the liquidity and interoperability of the Ethereum network.

Wrapped Monero (WMXMR)

Wrapped Monero is a tokenized version of Monero that can be used on the Ethereum network. WMXMR is used to enable privacy-focused transactions on the Ethereum network and is an important component of the privacy-focused DeFi ecosystem.

WMXMR, or Wrapped Monero, is an ERC-20 token that represents Monero on the Ethereum blockchain. It is created by depositing Monero into a smart contract, which mints an equivalent amount of WMXMR tokens. This allows users to utilize the value of Monero in Ethereum-based applications and take advantage of the DeFi ecosystem’s opportunities.

Wrapped Filecoin (WFIL)

Wrapped Filecoin is a tokenized version of Filecoin that can be used on the Ethereum network. WFIL is used to enable storage and file-sharing on the Ethereum network and is an important component of the decentralized storage and sharing ecosystem.

WFIL, or Wrapped Filecoin, enables the representation of Filecoin’s value on the Ethereum network. It is created through a custodial process where Filecoin is deposited, and an equivalent amount of WFIL tokens is minted. These tokens can be used on the Ethereum blockchain for trading, liquidity provision, and accessing DeFi applications.

Wrapped Bitcoin Cash (WBCH)

Wrapped Bitcoin Cash is a tokenized version of Bitcoin Cash that can be used on the Ethereum network. WBCH is used to enable cross-chain interoperability between the Bitcoin Cash network and the Ethereum network.

WBCH, or Wrapped Bitcoin Cash, is created by locking Bitcoin Cash in a custodial wallet and issuing WBCH tokens in return. This wrapping process enables the utilization of Bitcoin Cash on the Ethereum network, providing access to DeFi applications and enhancing liquidity within the Ethereum ecosystem.

Wrapped Dogecoin (WDOGE)

Wrapped Dogecoin is a tokenized version of Dogecoin that can be used on the Ethereum network. WDOGE is used to enable cross-chain interoperability between the Dogecoin network and the Ethereum network and is an important component of the meme-coin DeFi ecosystem.

WDOGE, or Wrapped Dogecoin, brings Dogecoin’s value to the Ethereum blockchain through a wrapping mechanism. Users deposit Dogecoin into a custodian’s wallet and receive an equivalent amount of WDOGE tokens. These tokens allow Dogecoin holders to access the Ethereum ecosystem, participate in DeFi protocols, and benefit from the broader liquidity and trading opportunities available on Ethereum.

RenBTC

RenBTC is a unique ERC-20 token designed to provide a bridge between Bitcoin and the Ethereum blockchain. Its primary objective is to create a token that represents the value of Bitcoin, with 1 RenBTC being equivalent to 1 BTC. RenBTC is part of a larger project called RenVM, which aims to achieve blockchain interoperability by enabling the seamless transfer of assets across different blockchain networks.

RenBTC, created by Ren Protocol, allows for the wrapping of Bitcoin into an ERC-20 token. Users deposit Bitcoin into a smart contract, which generates an equivalent amount of RenBTC tokens. Ren Protocol utilizes a network of nodes to securely manage the wrapping process, ensuring the peg between RenBTC and Bitcoin remains intact. This enables Bitcoin holders to leverage the Ethereum ecosystem’s benefits, including access to DeFi applications and increased liquidity.

LSD

LSD (Solana) is a wrapped token that represents SOL, the native cryptocurrency of the Solana blockchain, on the Ethereum network. It allows users to access the Ethereum ecosystem and utilize SOL’s value in Ethereum-based applications and DeFi protocols. LSD is created by depositing SOL into a designated wallet and minting an equivalent amount of LSD tokens, which can be freely traded and used within the Ethereum network.

Advantages of Wrapped Tokens

Wrapped tokens offer several advantages over traditional cryptocurrencies and other blockchain-based assets. Some of the most significant advantages of wrapped tokens include:

1. Cross-chain interoperability: Wrapped tokens enable the transfer of value between different blockchain networks that lack interoperability. This allows users to move assets from one blockchain to another without having to sell or exchange them for a different asset.

2. Liquidity provision: Wrapped tokens can be used to provide liquidity on decentralized exchanges (DEXs) and other DeFi platforms. This enables users to earn a yield on their assets by providing liquidity to other users.

3. Access to DeFi: Wrapped tokens provide users with access to the growing decentralized finance (DeFi) ecosystem, which offers a wide range of financial services, including lending, borrowing, trading, and more.

4. Transparency: Wrapped tokens are often backed by a one-to-one ratio of the underlying asset, which provides transparency and accountability to users.

Highlights

• Wrapped tokens are tokenized representations of cryptocurrencies that operate on different blockchain networks.
• They enable the transfer of value between different blockchain networks that lack interoperability.
• Wrapped tokens are created by locking a certain amount of the underlying cryptocurrency on the original blockchain and issuing a corresponding amount of tokens on the target blockchain.
• This process is often facilitated by third-party custodians that hold the locked-up assets and issue the wrapped tokens.
• There are several types of wrapped tokens, including native wrapped tokens, synthetic wrapped tokens, and governance wrapped tokens.
• Each type of wrapped token serves a different purpose and has unique characteristics.
• Wrapped tokens offer several advantages over traditional cryptocurrencies and other blockchain-based assets, including cross-chain interoperability, liquidity provision, access to DeFi, decentralized governance, transparency, reduced volatility, and privacy.