What are wrapped tokens?

Wrapped tokens are a great way to facilitate trades between different cryptocurrency blockchains, something that in the past required exchanging one crypto for fiat and then buying another, not only taking up valuable time but potentially resulting in losses along the way. Today we take a dive into what are wrapped tokens, how do wrapped tokens work, are wrapped tokens safe, why they're important, and how you can get into wrapped tokens with BTC Markets.

Wrapped tokens explained

Wrapped tokens are a way for traders to use their crypto assets in one blockchain to easily trade in a different blockchain. The best examples of this are Bitcoin and Ethereum's wrapped tokens - WBTC and WETH. Wrapped tokens effectively let traders use their existing crypto as though they were a different cryptocurrency, without having to liquidate their assets beforehand.

One example would be if you held Ethereum assets and wanted to use Bitcoin for a purchase - rather than selling your Ethereum for fiat, you can use wrapped Ethereum (WETH) in the Bitcoin blockchain at a 1:1 value with the Ethereum you hold. An important factor in the value of crypto is liquidity, and by allowing interoperability between different blockchains, crypto can be used in more ways and more frequently traded.

How do wrapped tokens work?

The wrapping process

Think of it like a gift card or debit card that can be used in any country - you buy the initial card with Aussie dollars, but once you have the card purchased, it can be used in any country with the exchange rate built into the service. Wrapped tokens act similarly in that you can use them in other blockchains as though they are that cryptocurrency.

Redemption and unwrapping

The key to redeeming or ‘unwrapping’ wrapped tokens is a centralised platform (like BTC Markets) that acts as a custodian for your underlying crypto assets. When you redeem your wrapped token on a different blockchain, the token is returned to the custodian in exchange for your original crypto asset. Safety and transparency are vital here, much like if you're holding funds in escrow before a major purchase.

Are wrapped tokens safe?

Security considerations

Wrapped tokens are as safe as the method you choose to ‘create’ them - either a decentralised smart contract or centralised custodian. To ensure you're not exposing yourself and your investment to risk, it's important to make sure your custodian offers sufficient security measures - these can include audits, multi-signature wallets, and the reputation of the platform (like BTC Markets) when it comes to facilitating trades. Smart contracts effectively lock the crypto asset in a vault and create a wrapped token that represents the asset at a 1:1 value. You’ll want to ensure any smart contract you use is transparent and secure.

Risks and best practices

Wrapped tokens carry a lot of the same risks associated with cryptocurrencies in general, as well as issues with the security of the custodians involved, technical or security flaws in smart contracts, and potential issues with liquidity causing delays in trades which can result in gains being affected. Like all things crypto, research is key here; ensuring you do your due diligence in selecting the right platform with proper security measures, or transparent, automated smart contracts.

Advantages of using wrapped tokens

Cross-chain compatibility

The biggest advantage of using wrapped tokens is cross-chain compatibility - that is, being able to use one cryptocurrency in another blockchain. This means that traders who hold assets in one blockchain (such as Bitcoin) can take advantage of their crypto in Ethereum-based platforms (or others) for decentralised finance (DeFi) purposes, effectively avoiding the need for intermediaries like banks or financial services. This helps to improve liquidity and trading opportunities for cryptocurrency traders.

Improved liquidity and efficiency

The worst thing for the value of cryptocurrency is the stagnation of trade, so any opportunity to improve liquidity and trading efficiency will benefit crypto as a whole. By signing up with BTC Markets, you can use wrapped tokens to access new markets and trade across different blockchains with more speed, efficiency, and security measures that will keep you better protected from risk.

How to trade wrapped tokens on BTC Markets

Step-by-step trading guide

Getting started with wrapped tokens is a very straightforward process with BTC Markets. Sign up for a free account and you can right away deposit either your crypto or fiat currency into your account. Next, you’ll want to search through the available wrapped tokens on BTC Markets - these include WBTC and WETH - and then execute the trade. At this point, you can either use your newly minted wrapped tokens in their blockchain or hold onto them for future investment.

Why trade wrapped tokens on BTC Markets?

BTC Markets is the ideal place to trade wrapped tokens, not just so you can gain access to new blockchains with your existing crypto assets. BTC Markets offers proven security, increased liquidity, and a very simple platform to get started on. We make it easy for beginners and experienced traders to take advantage of wrapped token trading with low fees and easily accessible trading pairs - all you need to think about is how you want to invest your fiat or crypto.

Future of wrapped tokens in cryptocurrency

The role of wrapped tokens in expanding DeFi

Slow adoption of cryptocurrency was a limiting factor in the past, with traders keen to make use of their crypto but faced with either limited options to do so, or restrictive banks and financial institutions making it less viable or too expensive. By utilising wrapped tokens, the decentralised finance (DeFi) space can continue to expand as traders are not limited by the blockchain they have chosen to invest in.

Emerging use cases for wrapped tokens

Cross-chain solutions not only improve liquidity by offering better opportunities to invest or spend crypto, but reduce the limitations that some blockchain networks suffer from - such as slow processing or expensive fees. This is further enhanced by emerging uses such as decentralised exchanges (DEXs), lending protocols (to use crypto as collateral on loans), and yield farming (where you can earn rewards by depositing your tokens in a decentralised pool to help boost its liquidity).

Trade wrapped tokens securely on BTC Markets now

Whether you’re a new trader or experienced in crypto, wrapped tokens are a great way to use cryptocurrency across a much broader network of blockchains. While security can be a concern, by using a platform like BTC Markets you reduce the risk and gain access to improved security, liquidity, and a user-friendly experience that simplifies the process.