What is a Wrapped Token?

by CUTcoin team
The aggregate trading volume on the Uniswap decentralized exchange has recently surpassed $100B. Along with this, the rally of Bitcoin and most other coins continues. In our opinion, in addition to institutional investors (such as MicroStrategy), an important role in such a rapid development is also played by the emergence of a huge number of wrapped tokens, which we will discuss today in this article.

The tokenization of traditional assets, such as securities, precious metals, commodities, real estate and so on is a process of creating a digital copy of an asset, presented in the form of a digital record (which can be both on the blockchain and on a distributed ledger with a different architecture, for example, as in R3 Corda), that can be traded simultaneously and without borders. Today, let's see why we need tokenized (wrapped) crypto tokens.

The Basics of Wrapped Tokens

A wrapped token is an asset hosted on the specific blockchain at a price that matches the price of another underlying asset, even if it is not on the same blockchain or blockchain at all. It can be said that it is a kind of crutch that allows the cryptocurrency of one blockchain to function on the network of another blockchain. So, for example, the Tether stablecoin exists at least on the Omni, Ethereum, Tron and some others networks.

For the most part, this contributes to the massive adoption of this currency (the target market of users is increasing at the expense of those who are used to the native blockchain of the more popular currency in which the wrapped token now exists). Wrapped tokens increase the interaction between different blockchains so that assets can move between chains. But recently, another no less important reason has appeared.

The Rise of Ethereum dApps
In most cases, when talking about wrapped coins, people talk primarily about Ethereum tokens of the ERC-20 standard. For instance, Wrapped Bitcoin (wBTC) is a token equal to the value of one BTC at any given moment, since the smart contract algorithm reproduces its price in real time and adjusts the underlying fund using supply and demand information obtained from user transactions. In exchange for their money, the users of the wrapped tokens receive an equivalent amount of value "wrapped" in an asset. Why is this needed?

Let's look at a specific example. Suppose you have XMR and want to trade it on the Uniswap decentralized exchange. Since Uniswap is built on Ethereum, it only supports ERC20 tokens. Since XMR works on a completely different protocol, in order to trade in a pair of XMR/any DeFi token traded on Uniswap, the user must first exchange XMR on an exchange or instant swap service to, say, wETH (a funny thing — ETH itself is not ERC20 compatible, but it's another story to tell), and only then buy the required DeFi token on Uniswap.

In addition to the direct inconvenience in the form of a multitude of actions, this procedure is associated with the additional fee for the exchange of XMR to ETH. Instead, if we have a tokenized version of XMR (wXMR), one would be able to trade directly wXMR/required token pair, though this requires liquidity in both pairs. One can read how decentralized exchanges work in our previous article.

Indeed, the development of decentralized finance to date is mostly related to Ethereum. The TOP 5 protocols (Maker, Aave, Compound, Curve Finance, Uniswap), largest in terms of locked funds, are built and operate on the Ethereum blockchain. The total market for DeFi applications on Ethereum is estimated at about $40 billion (according to DeFi Pulse) and continues to grow steadily.
Heading Towards Wrapped CUT
The CUTcoin team is currently exploring various options for implementing the wrapped version of the CUT. In addition to the actual technical implementation, we are also exploring the possibility of third-party audit of our solution, or collaboration with companies that have already developed wrapped tokens for other coins, especially privacy coins.

Watch this space for more.