To answer this, it may be helpful to first touch on the first cryptocurrency ever created - Bitcoin. Bitcoin remains one of the most popular and sought after digital assets, with people holding on to BTC as a store of value or intending to use it in place of physical money. Whatever the case may be, Bitcoin is tied to its own blockchain, making it extremely difficult to integrate it into a different blockchain ecosystem without modifications having to be made; this is where the notion of 'wrapping' a coin comes into play.
It's known as a "wrapped" token because the original asset, in this case, bitcoin, is put in a "wrapper" or 'digital vault' that enables the wrapped version to be hosted on a different blockchain. For example, a popular wrapped coin is WBTC, which is bitcoin (or fractions of a bitcoin) wrapped in Ethereum, which gives it access to the entire Ethereum ecosystem. To visualize this, imagine the wrapped bitcoin, WBTC, has become an ERC-20 token with its price determined by a smart contract algorithm that reproduces its value in real-time.
Why Use Wrapped Coins?
In exchange for their money, wrapped token users get an equivalent amount of value "wrapped up" in an asset that decentralized applications can more readily mobilize. Furthermore, as a wrapped coin can access the other blockchain, it opens up exciting opportunities to harness the functionality of the host chain, making it easier to integrate into dApps and access other projects.
Other assets such a gold, equity shares, real estate etc., can also take advantage of wrapping by having their values pegged to a blockchain token. This allows the user to trade the wrapped version of their asset on the blockchain.
Wrapping unlocks a wide range of benefits, including fractionalized ownership of assets which could be a tiny fraction of a high-cost share or fractions of an expensive NFT. And of course, as the assets are on the blockchain, users control their token using their own private keys.
Harnessing the power of the blockchain facilitates the real-time settlement of financial transactions with complete transparency. In addition, any issues with double-spending are removed because the unit of value can only be transferred once. The total number of wrapped tokens and any associated transactions such as minting, burning, one-way transfers, atomic swaps, multi-sig transactions etc., are visible to anyone using a blockchain explorer, bringing unparalleled levels of transparency.
Wrapped tokens allow developers to tap into the programmability of smart contacts to code financial and physical assets. For example, payments or transfers could be triggered once certain smart contract conditions have been met. Once the smart contract deploys to the network, it will run autonomously, continually actioning the logic of its code without the need for intermediaries.
Blockchain transactions go through in seconds and can be carried out 24/7, 365 days of the year, as there is no need to wait for any physical exchanges to open for trading. Furthermore, the atomic nature of the blockchain guarantees that all parts of a transaction, which may be taking place between multiple parties, must complete in a single transaction, or all will fail. This enables real-time automated settlement and removes the need for reconciliation.