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By Kapil Rajyaguru
Have you ever found it annoying that BTC cannot be used on Ethereum? BNB Smart Chain (BSC) on ETH? It is not possible to simply move coins that are present on one blockchain to another.
To get over this restriction and use non-native assets on a blockchain, use wrapped tokens.
A solution to the blockchain interoperability issue is wrapped tokens.
For instance, if you are travelling from India to the USA, you must exchange your Indian rupees (INR) for US dollars.
To address this issue, wrapped tokens were created. Wrapped tokens make it easy to transfer assets between blockchains and utilise them throughout the cryptocurrency ecosystem.
One of the best-known wrapped tokens is Wrapped Bitcoin (WBTC). WBTC is pegged 1:1 to the price of Bitcoin (BTC), so that one WBTC should always equal one BTC.
But unlike BTC, WBTC is available as ERC-20 or TRC-20 tokens, which means it can be used and traded on the Ethereum and Tron blockchains.
Types of Wrapped Tokens
There are two types of wrapped tokens, cash-settled and redeemable.
Cash-settled tokens cannot be redeemed for the underlying asset.
On the other hand, redeemable tokens allow investors to exchange the wrapped token with the underlying asset.
Which Wrapped Token Has The Biggest Market Share
Well, according to latest data from coingecko, as of December 2022, the total wrapped-tokens market capitalization is $3.15 billion.
Out of dozens of wrapped tokens, wrapped bitcoin has the biggest market capitalization of over $3 billion.
Wrapped Tokens and Taxation
Wrapped or bridged tokens are subject to the same tax regulations as other cryptocurrencies.
Advantages of using wrapped tokens
- Interoperability
- Increased Liquidity
- Faster Transaction Speed
- Enhanced Security
- Lower Transaction Fees
Disadvantages of using wrapped tokens
- Custodian Reliance
- Prone To Centralization
The benefits of wrapped tokens outweigh the negative features.
Moreover, in the future, it is expected that these minor disadvantages will be removed. Perhaps a custodian (DAO, smart contracts, or multisig wallet) may not be needed in the future to wrap or unwrap tokens.
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