Decoding Wrapped Tokens: STETH, WBTC, RETH
To utilize cryptocurrencies across various networks and applications, coins are transmitted through cross-chain bridges, which give the asset the status of being “wrapped.”
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Certain wrapped tokens, for example STETH or WBTC, secure spots in the top 100 by market capitalization as per CoinMarketCap. This position is attributed to their significant issuance and extensive use within the DeFi ecosystem.
In this article, we'll break down the types of wrapped tokens, guide you on where to buy them, and illustrate how to utilize those for your own benefit.
What's the purpose of wrapped tokens?
At first glance, wrapped tokens may seem akin to stablecoins, but instead of being pegged to fiat currency (like dollars, euros, or gold), they're tied to a cryptocurrency or token. This is done for several reasons:
● To enable the use of native cryptocurrency on a different blockchain;
● To facilitate trading on DEX;
● For staking, farming, or participating in DAO voting process;
● To sidestep using centralized exchanges in one's own operations.
Wrapped tokens can be created for a variety of cryptocurrencies like BTC, ETH, SOL, BNB and others, provided their blockchains support smart contract technology.
Official wrapped tokens
WBTC serves as the official wrapped token for Bitcoin. As reported by CoinGecko, more than 150,000 BTC have been transferred across diverse networks. The market capitalization of WBTC exceeds $4 billion.
WBTC operates across over 15 blockchains, where you can send, receive, and store your wrapped Bitcoin. Similarly, there are official wrapped tokens for other cryptocurrencies (for instance, WETH, WSOL, WBNB). Most of these tokens carry a prefix “W” at the beginning, symbolizing “Wrapped”.
Interestingly, when viewing trading pairs and liquidity on dextools, the BNB cryptocurrency in the BSC network is displayed as WBNB. This is because the coin was initially of the ERC20 standard, later developed its own network with the BEP2 standard, and finally BEP20. Consequently, BNB on the BSC blockchain is a wrapped token.
Ethereum liquid staking
Liquid staking refers to investing your ETH cryptocurrency into an official staking pool, followed by receiving a wrapped token for personal use. These tokens are directly linked to the Ethereum value, maintaining a 1:1 ratio. They can be conveniently used for trading or engaging in DeFi activities. For an in-depth understanding of liquid staking, refer to our dedicated article on the topic.
Each project offering liquid staking has its unique wrapped ETH token. For instance, Lido DAO uses STETH, Rocket Pool uses RETH, FRAX uses FRXETH, and the list goes on. The specifics, like official contracts, token names, and their market caps, can be found on the respective project websites.
Wrapped voting tokens
Several DeFi projects have their autonomous organizational model known as DAO (Decentralized Autonomous Organization). Within this setup, users can manage the project, propose ideas, and cast votes on those proposals.
Participants of the DAO need to possess the project's tokens. However, usually, this asset is a wrapped token. The reason being to efficiently calculate the count of participants, block certain tokens during voting, and streamline auditing and vote tracking processes. Therefore, projects distinguish between the native coin and the voting token.
Examples of such wrapped voting tokens are many, such as xGRAIL in DEX Camelot on Arbitrum, veSTG in Stargate Finance, and so forth. These tokens all have different prefixes and information about them can be located in the “DAO” or “Voting” sections.
Assets for DeFi project participation
Many coins are simply deployed for DeFi activities such as:
● Lending and securing funds in liquidity,
● Leverage farming,
● Coin swaps sans the use of cross-chain bridges.
Usually, the majority of DEXs, lending protocols, or yield farming platforms have their distinct wrapped tokens. This implies that these assets can be procured within these platforms by swapping them for the available cryptocurrency.
On DEX Orca, wrapped tokens like stSOL, mSOL, and whETH, on the decentralized exchange TraderJoe you'll find BTC.b, and cbETH is on DEX QuickSwap. You can typically find most tokens in the “farming” or “Pool” sections.
Risks associated with wrapped tokens
The primary drawback of wrapped tokens is the sophistication of the underlying technology. It's a challenge to create a highly secure smart contract that would trace the price of the native coin. Hence, cross-chain bridges and liquidity pools interacting with wrapped tokens often become the targets of hacker attacks.
Also, some tokens aren't created by the platform or project itself but by community members. Hence, these assets aren't officially recognized. It's essential to keep this in mind before beginning work with wrapped assets.
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