Table of Contents
Cryptocurrencies are taking over financial markets across the world, even more so since the Covid pandemic of 2020. If you have thought to buy crypto in India, you might know this thing about cryptocurrencies: native crypto tokens from a specific blockchain can’t be used on other blockchain platforms. So before wrapped tokens, if you wanted to buy cryptocurrencies in India, you’d have had to buy different tokens for the blockchain platforms you wanted to be a part of. However, wrapped tokens quite efficiently solve that problem now.
And what are wrapped tokens, you wonder? In this post, we answer that question for you, and tell you about the workings of wrapped tokens. So if you’re looking to buy crypto in India, you’d better give this post a read!
What is a Wrapped Token?
Before wrapped tokens, you couldn’t use the token from one blockchain on another, as mentioned before. So you couldn’t use ETH for a bitcoin exchange on the Bitcoin platform, you couldn’t use BTC on the Binance Smart Chain, and so on and so forth. However, wrapped tokens solve that problem by acting as bridges between blockchain platforms.
You can think of a wrapped token as a tokenized representation of a cryptocurrency on a blockchain said crypto isn’t native to. Wrapped tokens are named thus because it’s like symbolically putting a crypto into a wrapper, a wrapper that is actually a digital vault that allows the minting of the wrapped token.
Get WazirX News First
Wrapped tokens exist on the Ethereum blockchain, and they represent the same value as the actual value of the crypto they stand for. Ethereum’s wrapped tokens are based on the standard for the usual Ethereum tokens – the ERC-20 token standard. Wrapped tokens’ values can be pegged to the crypto they represent through smart contacts, or they can be backed by the crypto they represent at the ratio of 1:1, like stablecoins. Take WBTC, for example. WBTC, or Wrapped Bitcoin, represents Bitcoin on the Ethereum platform. An ERC-20 token, a WBTC holds the same value as an actual BTC. The protocol uses a smart contract algorithm to update WBTC’s price according to the real BTC’s price and maintain WBTC’s underlying fund and acquire the needed supply.
Wrapped Tokens vs. Smart Contracts:
Speaking of smart contracts, if you’re familiar with the world of crypto, you might realize that wrapped tokens sound a lot like stablecoins, both representing the values of another asset. The basic difference is this: while the price of a stablecoin can be tethered to a number of assets, including fiat currencies like the USD, other cryptocurrencies, and physical assets like precious metals, a wrapped token is only a symbol of a cryptocurrency on a non-native blockchain.
So, How Do Wrapped Tokens Work?
In a wrapped token’s working, there’s a number of organizational positions involved, as are algorithmic checks and balances. The mechanism behind the wrapped tokens ensures their trustless nature. dApps, or decentralized applications, are able to process wrapped token transactions quickly and effortlessly, for in this case they don’t have to be conducted across more than one blockchains.
As for the organizational positions, the working of wrapped tokens usually needs a custodian – an important position that holds an equivalent amount of the crypto tokens that the wrapped tokens represent, the same as the amount held up in the wrapped tokens. You can say the custodian is basically the wrapper and the unwrapper of the wrapped tokens. The position of a custodian can be held by anyone or anything – a merchant, a smart contract, a multisig wallet, or even a decentralized autonomous organization or a DAO. As for the governance of wrapped tokens, it’s usually handed in tandem by a number of custodians, who assume different roles and are handed the power to mint new wrapped tokens or burn existing ones as per necessity.
Again, let’s take WBTC for example, to demonstrate a wrapped token’s working. With WBTC, the custodian has in possession 1 BTC for every WBTC coin created. When a merchant needs a WBTC, they have to send a BTC to the custodian. Now the custodian generates a WBTC in exchange for that merchant.
On the flip side, if a WBTC needs to be burned and a merchant needs their BTC back, they would simply have to request the same of the custodian. The custodian would burn the WBTC accordingly and return the merchant’s BTC to them. Also, for Wrapped Bitcoin, the function of adding or removing custodians and merchants is done by a decentralized autonomous organization.
Why Are Wrapped Tokens Advantageous?
Wrapped tokens have many advantages, but here’s the primary ones rounded up:
- Wrapped tokens increase interoperability between blockchains and provide a simple way to conduct exchanges, like WBTC allows Bitcoin exchanges on the Ethereum chain.
- Since wrapped tokens can be used to put idle assets to use and also trade these new assets on a non-native blockchain, they create the scope for more liquidity and capital efficiency.
- Wrapped tokens can help traders avoid extra transaction fees on different blockchain platforms, thus they are also cost effective.
And there was everything you need to know about wrapped tokens. To buy crypto in India, do give our website a visit. On WazirX, you can trade Bitcoin and over 100 other cryptocurrencies in India!
Frequently Asked Questions
Can I Invest In Cryptocurrency?
Yes, with exchanges like WazirX, you may invest in cryptocurrency in India. To begin, go to the WazirX website and register. After that, you will receive a verification email. The link received by verification mail will only be available for a few seconds, so make sure you click it as quickly as possible. This will successfully verify your email address. The following step is to set up security, so choose the best solution for you. After you've set up the security, you'll be given the option of continuing with or without completing the KYC process.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
What Is Crypto?
Crypto or a cryptocurrency is a digital currency protected by cryptography, making counterfeiting and double-spending nearly impossible. Blockchain technology is used to produce cryptocurrencies (a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are distinct in that a government does not issue them. The word "cryptocurrency" refers to the encryption methods employed to keep digital currencies and the network secure.
Are Cryptocurrencies A Good Investment?
Cryptocurrency has the potential to make you extremely wealthy, and the potential to cause you to lose your money. Crypto assets, like any other investment, come with many risks and potential rewards. Fundamentally, cryptocurrency is an excellent investment, particularly if you want to gain direct exposure to the demand for digital currency.
Is crypto legal?
Crypto is legal in most countries, including India. While nations like the U.S. and many in Europe have regulatory frameworks, others like China have strict bans.
Is Mining Cryptocurrency Legal?
Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.
What Are The Best Cryptocurrencies To Invest In?
The best cryptocurrencies to invest in would be the ones you study and analyze in detail. Some of the most popular cryptocurrencies include Bitcoin, Ethereum, and many altcoins such as Tron, Ripple, Litecoin, etc.
Is Ethereum Safe To Invest?
The Bitcoin market is unquestionably more volatile than the stock market. This may not be the market for you if you are incredibly risk-averse. Ethereum, on the other hand, may be a terrific investment for you if you're a diamond-handed investor who won't lose sight of short-term losses. Ethereum is a relatively safe investment as it is also based on blockchain.
Is Cryptocurrency Banned In India?
No, cryptocurrency is not banned in India. India has seen its ups and downs in the crypto sector concerning its legal status. The Reserve Bank of India (RBI) issued a circular in April 2018 advising all organizations under its jurisdiction not to trade in virtual currencies or provide services to assist anyone in dealing with or settling them. A government committee proposed outlawing all private cryptocurrencies in mid-2019, with up to ten years in prison and severe penalties for anyone dealing in digital currency. The Supreme Court overruled the RBI's circular in March 2020, allowing banks to undertake cryptocurrency transactions from dealers and exchanges.
How Safe Are Cryptocurrencies?
Cryptocurrencies can be safe, but your crypto wallets can be hacked if proper security steps are not performed.There are also dangers and uncertainties associated with investments, and we cannot declare any virtual currency investment risk-free. Buying and selling cryptocurrencies does not have to be dangerous if the trader is well-versed in the market and treats his coins with care.
Disclaimer: Click Here to read the Disclaimer.
