How does the wrapped cryptocurrency work?

The Creation of Wrapped tokens is called Minting and the Destruction of tokens is called Burning. The mint process is done by sending the bitcoin to a custodian who stores the bitcoin in a digital vault. Then the underlying assets (Commodities, Intangible assets, or real estate) are locked. Once the underlying assets are locked then the equivalent amount of Wrapped bitcoin is minted.

Steps of how Wrapped Token works in a Bitcoin

Let’s consider an example of Wrapped Bitcoin (WBTC) — a tokenized version of Bitcoin on Ethereum. In other words, WBTC is 1:1 pegged to the value of BTC.

• First, the user transfers an amount to the original Bitcoin to a custodian address on the bitcoin blockchain.
• The Second step is to lock the original Bitcoin by the custodian.
• The next step is that the custodian mints the real BTC (Bitcoin) on Ethereum and sends the equivalent amount of WBTC back to the merchant.
• By now, the merchant can also send WBTC to the custodian and receive the equivalent amount of BTC in return.

Wrapped token generally needs a custodian which is an entity that has the same number of assets as the wrapped tokens. As said earlier, the custodian needs to hold 1 BTC for every 1 WBTC that is minted.

Future of wrapped Cryptocurrency

The transfer of assets into different blockchains creates a challenge for the industry. As more blockchains are created, it requires a greater number of bridges to check those assets on a blockchain and easily transfer into the blockchain increases exponentially.

In the future, wrapped tokens are used as the central part of the solution for consistency. From the technical perspective, bridging the gap between different blockchains makes the transactions and security more efficient.

Final Thoughts

Wrapped tokens such as wrapped bitcoin tokens create consistency between the blockchains by which people can move their assets easily and take the advantage of other blockchains. Advantages may it provides faster transactions, lower fees, and open farming opportunities. From the future perspective, wrapped tokens continue to be the core solution for interoperability.