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.
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
Is Bitcoin And Cryptocurrency The Same Thing?
Bitcoin is a cryptocurrency that was designed to facilitate cross-border transactions, eliminate government control over transactions, and streamline the entire process without third-party intermediaries. The absence of intermediaries has resulted in a significant reduction in transaction costs. Satoshi Nakamoto, the creator of Bitcoin, created the first cryptocurrency in 2008. It began as open-source software for money transfers. Since then, plenty of cryptocurrencies have emerged, with some focusing on specific fields.
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 Legal In India?
In India, cryptocurrency is legal, and anyone can buy, sell, and trade it. Because India lacks a regulatory system to regulate its operations, it is presently uncontrolled. According to the Ministry of Corporate Affairs, companies must now document their crypto trading/investments inside the financial year.
Is Cryptocurrency Safe To Invest In?
Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.
Is Crypto Legal In India?
Cryptocurrencies are legal in India, and anyone can purchase, sell, and exchange them. It is currently uncontrolled, as India lacks a regulatory structure to oversee its operations. Per the Ministry of Corporate Affairs, companies must now record their crypto trading/investments within the financial year. In cases where a person receiving the gains is an Indian tax resident, or the cryptocurrency is regarded as domiciled in India, cryptocurrency transactions have been taxable in India
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.
How To Invest In Cryptocurrency?
There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is considered the procedure of verifying and adding transactions to the blockchain public ledger. Another option is via cryptocurrency exchanges. Exchanges generate money by collecting transaction fees, but there are alternative websites where you can interact directly with other users who want to trade cryptocurrencies.
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 Virtual Currency?
Virtual currency is a type of uncontrolled digital currency that can only be used online. It is exclusively stored and transacted using designated software, mobile or computer applications, or unique digital wallets, and all transactions are conducted through secure, dedicated networks. Because digital currency is just currency issued by a bank in digital form, virtual currency is not the same as a digital currency. Virtual currency, unlike ordinary money, is based on a trust structure and cannot be issued by a central bank or other banking regulatory organization.
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.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
