What are Wrapped Tokens? | Nasdaq


By placing the cryptocurrency in a special type of digital safe, one can create what is called an encapsulated token. Whose value depends on the stored Bitcoin, but the encapsulated asset runs on a separate blockchain.

For example, consider Packaged bitcoin (CRYPTO: WBTC) and Bitcoin BEP-2 (CRYPTO: BTCB). We can exchange WBTC or BTCB for Bitcoin (CRYPTO: BTC) directly on most wallets. And both are Bitcoins, but they don’t work on the Bitcoin blockchain. Instead, they trade on the Ethereum (ERC-20) and Binance (BEP-2) chains. Binance is the world’s largest cryptocurrency exchange in terms of trading volume.

Readers may be wondering: what’s the point of going through all of this? Well, creating an encapsulated token allows users to use their Bitcoin in self-executing programmable agreements – aka, smart contracts – and earn a fixed income.

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Bitcoin, but a little better

The technology behind Bitcoin is quickly becoming obsolete. You can only use regular Bitcoin to send money to each other, so its usefulness is limited and the network is relatively slow and inefficient. In fact, the Bitcoin blockchain can only process four transactions per second with an average confirmation time of 10 minutes. Everything changed with the invention of WBTC and BTCB.

Take WBTC. Anyone who has money in these tokens can lend it out through smart contracts on decentralized funding platforms like Aave. It allows users to connect their wallets and deposit cryptos or take out loans.

Lenders receive up to 4% per annum at a fixed interest rate. Meanwhile, borrowers give their crypto as collateral, which automatically returns to the lender in the event of default. As a result, Bitcoin holders who need cash but don’t want to sell their coins can pledge their WBTC and take out a loan in the form of stable coins indexed to the US dollar or other fiat currency.

The interest rate on these loans typically ranges between 3% and 9% per year, which is usually a better deal than swiping credit cards and paying 20% ​​compound interest per year. In addition, the payment terms are much more flexible than personal loans issued by banks, which usually extend over a period of a few years to maximize interest profit.

Investors can also deposit their WBTC in liquidity pools to facilitate crypto trading. For example, imagine that some day a large crypto market participant decides to offload $ 10 million from an obscure altcoin. However, there are not enough buyers. Peer-to-peer liquidity providers can come in and buy these altcoins at below-market prices and then return them at above-market rates. LPs typically earn a 0.3% commission for each trade they pro-rate with their coins. So, in the example above, the WBTC investor would receive $ 3,000 for this trade if they deposited $ 1 million worth of WBTC and facilitated an equivalent volume of buying altcoins. Rewards are deposited automatically as long as tokens are used to provide liquidity on the platform.

A big step forward

The possibility of earning a fixed income from one’s Bitcoin holdings is definitely new. Additionally, wrapped token holders will continue to benefit from any Bitcoin price gain, as both WBTC and BTCB are directly pegged to it. Also note that one can reinvest interest in financial services, resulting in compound earnings. Even if one is not a big fan of the two decentralized financial services mentioned above, there are also tools like WBTC savings accounts, which offer higher interest rates than those of the big banks.

In sum, wrapped tokens are yet another innovation in the booming cryptocurrency space. Bitcoin holders should definitely consider exchanging their BTC for WBTC or BTCB, and take the opportunity to earn some extra cash at the same time.

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Zhiyuan Sun owns shares of Bitcoin. The Motley Fool owns shares and recommends Bitcoin. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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