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.
Read also: Top 10 AI Crypto Coins to Keep Your Eye on
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.
*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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