Wrapped tokens convert one asset (e.g., BTC) into a standardized token (e.g., ERC-20 WBTC) on another blockchain to enable cross-chain interoperability. They work by locking the original asset in a smart contract or digital vault and minting equivalent tokens on the target blockchain, addressing blockchain incompatibility. For example, WBTC allows Bitcoin to be used in Ethereum’s DeFi protocols, enhancing liquidity and use cases, such as serving as collateral on Aave or trading on Uniswap. Wrapped tokens are vital in DeFi, supporting cross-chain trading, lending, and liquidity mining. According to Arcane Research, in 2021, 189,000 BTC were locked on Ethereum, representing 1% of its circulating supply. They reduce transaction fees and increase speed, particularly for slower blockchains like Bitcoin. However, wrapped tokens rely on custodians to manage original assets, introducing some centralization risks, and smart contract vulnerabilities may lead to asset losses. Wrapped tokens foster blockchain ecosystem interconnectivity, driving decentralized finance growth, with potential for broader application across more blockchains.
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