What Are Wrapped Crypto Coins? A Full Guide for Beginners.

The concept of wrapped cryptocurrencies came about in 2018, a time when it wasn’t common for tokens to be minted on multiple blockchains. With the application of this concept, a cryptocurrency could be used on another blockchain while retaining its original value.

Fittingly, the first wrapped cryptocurrency was Wrapped Bitcoin (WBTC), launched in 2019. It’s a token on the Ethereum network which represents Bitcoin’s (BTC) value at a 1:1 ratio. Because BTC was now available to a whole new set of users, its utility saw a large boost.

Read on to learn all about wrapped cryptocurrencies in our handy beginner’s guide — and also all things Web3, AI, and blockchain.

Why Do Wrapped Cryptocurrencies Exist?

The idea of wrapped cryptocurrencies was conceived to address the limited utility of tokens. For example, if you owned BTC and wanted to transact on the Ethereum network, you had to trade it for ETH or an ERC-20 token. Because of how fast the cryptocurrency market moves, it wasn’t ideal for Web3 participants.

A wrapped cryptocurrency ensures that you benefit from your asset’s value being retained while enhancing its utility. This has a trickle-down effect, increasing liquidity in the cryptocurrency market, building transaction volumes for blockchains, and making Web3 more accessible.

Wrapped cryptocurrencies are links between blockchains as well. To use the example of BTC again – you’d be encouraged to transact on Ethereum because you know you can exchange your BTC for WBTC, and vice-versa.

In the future, wrapped assets could even integrate with Web3 AI ecosystems, enabling smarter, automated financial transactions.

How Do Wrapped Crypto Coins Work?

The Wrapping Process

Exchanging your tokens for its wrapped version at a 1:1 ratio is as simple as making a deposit into a smart contract. In the backend, however, several parties help facilitate this process: merchants, custodians, and decentralised autonomous organisations (DAOs).

The latter organisations oversee the wrapping and redemption process carried out by custodians and merchants.

The Unwrapping Process

Want your original tokens back? Just send the wrapped version back to the custodian. This is also known as making a redemption. Your wrapped tokens are burnt by the custodian, preventing duplication and maintaining the 1:1 peg between the original and wrapped cryptocurrencies.

4 Popular Wrapped Crypto Coins

1. Wrapped Bitcoin (WBTC)

As mentioned above, WBTC is the first wrapped cryptocurrency to be created. It’s an ERC-20 token whose value is equivalent to BTC. With the creation of WBTC, BTC holders could easily participate in DeFi activities, such as lending and trading on DEXes. This, in turn, boosted the liquidity of DeFi applications.

2. Wrapped Ether (WETH)

WETH is the ERC-20 version of ETH. If you’re thinking this sounds odd, recall how ETH was created two years before the ERC-20 token standard launched. With WETH, ETH holders can interact with dApps and DeFi applications which are unable to support Ethereum’s native token.

3. Wrapped BNB (WBNB)

BNB faces a similar problem as ETH. Although it’s the native cryptocurrency of the Binance Smart Chain, it doesn’t conform to the network’s BEP-20 token standard. This resulted in the creation of WBNB. And with the Binance Bridge, individuals can use their WBNB to transact on dApps which support ERC-20 tokens.

4. Wrapped AVAX (WAVAX)

AVAX is the Avalanche network’s native token, and as you can guess by now, WAVAX is the wrapped version of it. WAVAX is compatible with Ethereum’s ERC-20 token standard, enabling AVAX to be used across a wider range of dApps. It follows the same ethos as other wrapped tokens: improving its unwrapped version’s utility.

3 Downsides of Wrapped Crypto Coins

1. Centralisation Concerns

A wrapped cryptocurrency may be managed around the clock by a DAO, but there’s still the risk of centralisation. After all, it’s still a single organisation in charge of making sure that the assets held in reserve are secure and that every redemption can be performed swiftly at a 1:1 ratio.

2. Smart Contract Risks

As long as something interacts with the internet, it isn’t impervious to security breaches. The smart contracts that facilitate the wrapping process can have bugs, be hacked, and experience network congestion (especially on slower blockchains). DAOs and organisations overseeing their wrapped tokens need to monitor their smart contracts regularly.

As security remains a concern, AI-powered smart contract auditing — a growing field in AI blockchain — could help mitigate these risks too, through Web3 AI technology.

3. Dependence on Third Parties

When you exchange your cryptocurrency for its wrapped version, you technically lose control of it. You’re relying on a third party to hold its end of the bargain – that it will return your tokens to you at a 1:1 value with whatever amount you unwrap, no matter when you do it. This downside is similar to the first one raised above.

In Closing

Wrapped cryptocurrencies, also known as wrapped crypto coins, provide tokens which aren’t minted on multiple networks with much more flexibility and utility. These cryptocurrencies also remove the hassle of you having to exchange your current holdings for a totally different token just to transact on a dApp you’ve been interested in.

What’s more, the entire wrapping and unwrapping process is straightforward. This is a boon for Web3 newbies, while cryptocurrency veterans will appreciate the speed and convenience afforded by this process. Wrapped crypto coins may have several downsides of their own, but they’ve been one innovation to remember in the Web3 space.

aelf blockchain, a layer 1 solution enhanced with AI, is engineered to help tackle scalability and security challenges that have long plagued the blockchain industry. By leveraging AI's capabilities, aelf optimises resource allocation, predicts network congestion, and enhances the security of smart contracts.

The aelf ecosystem boasts a diverse range of decentralised applications, including AwakenSwap, Portkey, and eTransfer, which leverage the platform's advanced capabilities. Supporting a variety of tokens, aelf's ecosystem embraces ELF, ETH, USDT, USDC, BNB, DAI, and SGR, providing users with ample options for transactions and investments.

The native $ELF token reached an all-time high of $2.77 in its history. Notably, the token experienced a massive surge in value towards the end of 2024, consistently ranking among the top 10 crypto gainers during that period.

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*Disclaimer: The information provided on this blog does not constitute investment advice, financial advice, trading advice, or any other form of professional advice. aelf makes no guarantees or warranties about the accuracy, completeness, or timeliness of the information on this blog. You should not make any investment decisions based solely on the information provided on this blog. You should always consult with a qualified financial or legal advisor before making any investment decisions.

About aelf

aelf, an AI-enhanced Layer 1 blockchain network, leverages the robust C# programming language for efficiency and scalability across its sophisticated multi-layered architecture. Founded in 2017 with its global hub in Singapore, aelf is a pioneer in the industry, leading Asia in evolving blockchain with state-of-the-art AI integration to ensure an efficient, low-cost, and highly secure platform that is both developer and end-user friendly. Aligned with its progressive vision, aelf is committed to fostering innovation within its ecosystem and advancing Web3 and AI technology adoption.

For more information about aelf, please refer to our Whitepaper V2.0.

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Tool/Platform	What's it about
ChainGPT	An AI-powered assistant for the blockchain and crypto industry, specializing in content creation, language translation, smart contract coding, and more.
aelf	A high-performance, customisable multi-chain blockchain framework with AI-powered smart contracts and a developer-friendly environment.
Quick Intel	An AI-powered crypto security platform that helps investors avoid scams, rug pulls, and honeypots by analysing smart contracts, social sentiment, and on-chain data.
Cogwise AI News Aggregator	An AI-powered news aggregator that analyses real-time news and global trends to predict market movements in the crypto market.
OpenAI Codex	An AI system that transforms natural language into code, automating code creation for smart contracts, blockchain applications, and other development tasks.
QnA3	An AI-powered Web3 knowledge hub that provides real-time information and insights on cryptocurrencies, blockchain projects, and the broader Web3 ecosystem, with unique Solana Actions integrations.
Fetch.ai	A platform that combines AI and blockchain to create autonomous economic agents (AEAs) for various applications, including supply chain optimisation and smart city management.
Octavia	A decentralised digital identity (DID) platform for creating and managing self-sovereign digital identities, empowering users to control their data and online presence.
TensorFlow	A versatile open-source machine learning framework used for building AI models that can analyse blockchain data, enhance security, and predict market trends.
Alethea	A platform that creates 'Intelligent NFTs' (iNFTs) with unique personalities and the ability to engage in conversations, powered by AI and blockchain technology.

Chain	URL	Explorer
AELF	https://aelf-test-node.aelf.io/	https://explorer-test.aelf.io/
tDVW	https://tdvw-test-node.aelf.io/	https://explorer-test-side02.aelf.io/

Feature	Description
Inheritance	ERC-404 inherits from the interfaces IERC-404, IERC721 Receiver, and IERC165, implementing functions specified in these interfaces, behaving as both ERC20 and ERC721.
Data Structures	Mappings track balances, allowances, approvals, and ownership of tokens. Double-ended queue stores ERC721 token IDs. Data for managing ownership and indices of ERC721 tokens.
Constructor	Initialises token name, symbol, decimals, and other necessary variables for ERC20 and ERC721 tokens.
Token Minting and Burning	_mintERC20 function for minting ERC20 tokens. _retrieveOrMintERC721 function for minting ERC721 tokens and retrieving from a bank. _withdrawAndStoreERC721 function for depositing ERC721 tokens into the bank.
Transfers	Functions for transferring ERC20 and ERC271 tokens between addresses. Distinguishes between token types based on ID. _transferERC20WithERC721 function handles transfers involving both types.
ERC20 and ERC721 Interactions	Approve function handles approvals for both token types. Functions like transferFrom, safeTransferFrom, and permit handle transfers and approvals.
EIP-2612 Support	Supports EIP-2612 permit functionality for ERC20 tokens.
Interface Compatibility	Implements necessary functions for ERC-404 and ERC165 interfaces, indicating compatibility with ERC20 and ERC721 standards.

Role	Max Number
BP	2N+1, N starts from 8 in 2022
Candidate node	5*(2N+1)
Voter	No limit

Benefits	Description
Makes smart contracts 'smarter'	AI-driven smart contracts can autonomously modify terms based on predefined conditions and real-time data input, ensuring that the contracts are not just automated but also intelligent and self-improving over time.
Levelled up data analysis	Data is the new oil, and AI is the machinery that refines it. It is possible for AI to reduce large-volume blockchain data analysis time by up to 90%.
Boosts security	Through machine learning models, AI can prevent frauds and detect security threats in real time. It can identify potential breaches, predict future threats, and adapt to evolving security measures.
Lowers carbon footprint	AI algorithms help optimise energy consumption in blockchain operations, given the flak drawn by activities like Bitcoin mining.

What Are Wrapped Crypto Coins? A Complete Guide for Beginners