Description of wrapped token
A wrapped token is an asset hosted on the Ethereum blockchain with a price that is the same as another underlying asset, even if it’s not on the same blockchain or on a blockchain at all.
A wrapped token is an ERC-20 compatible token with a value identical to another asset that it represents, either through a smart contract or by being backed one-to-one with the underlying asset.
Wrapped Bitcoin, for instance, is a token worth the same as one BTC at any given moment, as a smart contract algorithm reproduces its price in real time and regulates the underlying fund with supply and demand information gleaned from user transactions. In exchange for their money, wrapped token users get an equivalent amount of value “wrapped up” in an asset that’s more easily mobilized by decentralized applications (DApps).
Wrapped Ether, is a token worth the same as one ETH.
Types of wrapped tokens ?
Because Ethereum is the biggest DeFi ecosystem, wrapped tokens are often those hosted on other blockchains but are also stablecoins that are pegged to the dollar.
Many of the first wrapped assets were, in fact, fiat-backed stablecoins, such as tokens with prices pegged to the dollar — Tether, Coinbase’s USDC or TrueUSD. There are also euro, yen, yuan and countless other fiat stablecoins that are mostly based on the Ethereum blockchain.
The Wrapped Zcash token (coming), a privacy coin, will provide Ethereum DApp users with the coin’s anonymity advantages, plus a reliable way to invest in Zcoin, thereby boosting its market.
Wrapped Zcash is a way for Zcash to be used within financial applications built on Ethereum — it opens a bridge from one ecosystem to the other. This two-way street benefits both Zcash and Ethereum users, as Zcash users are able to transact and invest within the many decentralized financial applications built on ETH.
This integration also brings an effect on the supply and demand for Zcash, which could prove a significant tailwind. For Ethereum users, the privacy benefits of Zcash enabled by its z-addresses and t-addresses provide new ways for decentralized finance (DeFi) applications to limit the publication of identifying information held in transaction data while still passing auditory and compliance standards.
These are backed accordingly via the reserves, with coins fed in according to the demand of online crypto exchanges and larger institutional investors who want to quickly exchange fiat money into crypto and manage their money within a given platform. This makes it as easy to deposit dollars into DeFi applications and blockchain wallets as it does to have a reliable counter currency providing traders relief from crypto asset volatility.
Blockchain interoperability
Other cryptocurrencies are beginning to launch wrapped versions of their tokens on Ethereum in larger numbers, with interoperability (The ability to share information across different blockchain networks, without restrictions) a vital consideration for solutions that want to be taken seriously.
Currently, one blockchain has no knowledge of information that might exist in a different blockchain. For instance, the Bitcoin (BTC) blockchain exists fully independently of the Ethereum (ETH) blockchain — in the sense that it has no knowledge of any information recorded there — and vice versa. Blockchain-based projects are isolated from each other, despite existing within the same industry and working with the same technology.
The crypto industry involves “a series of unconnected systems operating alongside, but walled from each other”. Blockchain interoperability is the ability to exchange data between different blockchains seamlessly, as if there were no boundaries.