The wrapped token is a cryptocurrency token tied to the value of another cryptocurrency. It is called a wrapped token because the original digital asset is placed in a “wrapper”, essentially a digital vault. It’s like a bridge that connects two different blockchains such as BTC and Ethereum for example.
The biggest advantage of such tokens is that they combine the strengths of different blockchains. Let’s consider this on the example of Bitcoin and Ethereum:
🔸 Bitcoin has a huge user base and a huge liquidity pool, Ethereum provides a powerful technology platform. The most important utility function of Ethereum is smart contracts, which facilitate complex transactions.
🔸 Connecting BTC to the Ethereum ecosystem also simplifies exchanges, wallets, and payment services.
🔸 With the Ethereum blockchain as the backbone, transactions via WBTC (Wrapped Bitcoin) can also be done much faster.
Wrapped tokens were developed for organizations (exchanges), traders and decentralized applications in order to optimize their work. They significantly help the development of the decentralized finance system (DeFi).