Those familiar with the crypto space might have come across the term wrapped token.’ New investors or beginners in the segment need to know that a wrapped token is an asset hosted on the Ethereum blockchain with a similar price to another underlying asset, even if it’s not on the same network or on a blockchain at all.
Simply put, a wrapped token is an ERC-20 token with an identical value to another asset that it represents, be it via a smart contract or by being supported one-to-one with the underlying asset.
For instance, wrapped Bitcoin is a token worth the same as one BTC at all times, as a smart contract algorithm mimics the pice in real-time and regulates the underlying asset with supply and demand data collected from user transactions. In exchange for their money, users of these wrapped tokens receive an equivalent amount of value ‘wrapped up’ in an asset that’s mobilized without difficulty by decentralized applications (DApps).
How Do Wrapped Tokens Work?
Wrapped tokens are each supported by an equal amount of the underlying asset or currency, along with a number of organizational purposes, algorithmic verifications, and balances.
DApps are able to process wrapped token transactions more rapidly because they are not carried out across numerous blockchains. Users can transact with confidence because wrapped tokens’ trustless character is kept by a framework that supports each one-to-one with the underlying assets.
The intricate model is sufficient to offer DApps users native access to other crypto coins without clogging both blockchains in the processing of any decentralized application transactions. All it takes is a minimal gas fee on Ethereum.
Zcash Launched a Wrapped Token, But Why?
Zcash is a crypto coin that can be transacted in an anonymous way, with no address information noticeable on the public ledger record. The Wrapped Zcash token was created to deliver Ethereum DApps users the coin’s anonymity benefits, as well as a dependable way to invest in Zcoin, thus, expanding its market.
Wrapped Zcash is a method for Zcash to be used within financial applications developed on Ethereum. The wrapped token acts like a bridge between the ecosystems – this twofold street benefits both Ethereum and Zcash users, as the latter are able to carry out transactions and invest within the numerous decentralized financial applications created on Ethereum.
This inclusion also has an impact on the supply and demand for Zcash, which could end up being a major tailwind. For Ethereum users, the privacy advantages of Zcash made possible by its z-addresses and t-addresses provide new methods for decentralized finance (DeFi) applications to restrict the publication of identifying data held in transaction data while still passing auditory and compliance regulations.
What Types of Wrapped Tokens are There?
Because Ethereum is the largest DeFi ecosystem, wrapped tokens are usually those kept on other blockchains but are also stablecoins that are pegged to the dollar. Most of the first wrapped assets were initially fiat-backed stablecoins, such as tokens with prices pegged to the dollar – Tether, Coinbase’s USDC, or TrueUSD. There are also yen, euro, yuan, and numerous other fiat stablecoins that are mostly based on the Ethereum blockchain.
These are supported in accordance with the reserves, with coins fed in as per the demand of online crypto exchanges and major institutional investors who want to quickly exchange fiat money into cryptocurrency and manage their funds within a certain platform.
This makes it easy and simple to deposit dollars into DeFi applications and blockchain wallets as it does have a dependable counter currency providing traders relief from crypto asset volatility. Other crypto coins are starting to launch wrapped variants of their tokens on Ethereum in larger amounts, with interoperability as a significant consideration for solutions that want to be considered.