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What are wrapped Tokens
The Blockchain technology though unique, does not permit communication between different Blockchain network. Different Blockchain network perform different functionality and different native coins. BTC can't operate on the Ethereum Blockchain and ETH can run on Bitcoin Blockchain.
In order to bridge the divide between Blockchains, wrapped token was developed .
Wrapped token can be defined as crypto currencies that have been pegged to another another Blockchain. The wrapped token represents value of the original token it represents.
For purpose of question, I will use the Solana Blockchain and the Tron Foundation Blockchain.
- Solana Blockchain.
Solana is a third generation Decentralized Blockchain technology that was developed to enable scalability through out the world by providing users friendly Applications. The Solana Blockchain uses the Proof of History consensus mechanism which makes it unique and fast.
The Solana Blockchain also uses wrapped BTC token through the Wormhole bridge to connect the Bitcoin and Solana Blockchain. Through the Wormhole communication bridge, the Solana Blockchain achieve interoperability with other Blockchain network.
Sollet. The wrapped BTC token on the Solana Blockchain is also called Sollet. The wrapped BTC token is a Bitcoin representation pegged on the Solana Blockchain. It represents the value of BTC on this platform. This facilitates the transaction of DeFi apps on the Solana Blockchain. Decentralized finance Applications (DEfi) can accept Bitcoin through SPL wrapped token.
- TRON Blockchain.
The Tron Blockchain is one of the Blockchain that uses wrapped Tokens to facilitate transaction between Blockchain network. Tron ecosystem was founded in 2017 by Justin sun. Tron Blockchain is a peer-to-peer Decentralized digital platform that aim at hosting entertainment Applications. The Tron ecosystem native coin is Tronix or TRX. The Tron Blockchain uses the TRC-20 token which is the same as the ERC-20 token.
However, other tokens or crypto currencies are not compatible with the Tron Blockchain network. This is where wrapped token comes in, a representation of Bitcoin or other crypto currencies on the Tron Blockchain.
Wrapped BTC or WBTC. This is a type of Bitcoin that exist on the Tron ecosystem. It is a wrapped token that represents the value of Bitcoin on the Tron platform to ease the interoperation of Bitcoin and Tron network.
We can swap the WBTC token with TRON on Poliniex, TronLink and other platform. Below us details of the WBTC token
Other financial asset are represented in the Tron Blockchain by the TRC-20 Token through the partnership signed between BITGo and Tron.
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As we have earlier mentioned and explained, the TRC-20 and ERC-20 tokens are both wrapped Tokens. These tokens help to represent TRX and ETH on different Network. TRC-20 and ERC-20 are very similar and even compatible. However there are some minor differences between them.
Difference between WETH on Tron and Ethereum Blockchain.
| WETH on TRON Blockchain | WETH on ETHEREUM Blockchain |
|---|---|
| The WETH is a wrapped token of the Ethereum Blockchain that runs on the Tron Blockchain(TRC-20). It represents Ether the native token of the Ethereum Blockchain | WETH is a Token representation of Ethereum and runs on the Ethereum Blockchain (ERC-20) |
| Running transactions on TRON using WETH TRC-20 is cheaper and faster | Running transactions using WETH ERC-20 is more costly than the TRC. |
| Burning of WETH TRC-20 is required on the Tron platform since the token is not Tron native currency but Ethereum. This is to control price and security of the token | Burning of token is not necessary since it is produced by the Ethereum Blockchain and is just a representation of the ETH. Users deposit ETH and can obtain WETH with it if they want to. They can also convert the WETH back to ETH. |
For this transaction, I will be using the Justswap exchange that is attached to the TronLink Wallet. I already have TronLink Wallet downloaded and installed on my phone, so I will proceed with the transaction. I will be exchanging 55 TRX which is equivalent to about $5.
- Step 1. I will log in to my TronLink wallet. Then I will click on the Justswap icon on the screen.
- Step 2. After clicking on Justswap, I will be redirected to the Justswap official exchange platform. As you can see, Justswap is already link to my TronLink wallet.
- Step 3. When I click on swap, the platform will navigate me to the swap interface, Firstly, I select the Swap currency and in this case I want to swap TRX with WBTT. After selecting the currency, I input the amount which is 55 TRX and click on Swap.
- Step 4. Confirming SWAP. The next step is to confirm Swap. As you can see I will be swapping 55TRX for 1421.345284. I will click on Confirm Swap button
- Step 5. Safe mode authorization. This is my first time performing a Justswap exchange and so I am recommended to d a safe mode authorization which I do. At this point I am ask to input my password which I do.
- Step 6. The next step to to confirm the contract by clicking on the Confirm Button below the page.
As can be seen after clicking on confirm, the swap has been successful and my TRON have been locked successfully.
In an effort to make the Tron Blockchain more user-friendly and attract more users, the Tron Blockchain which to incorporate as many as possible wrapped tokens into their DeFi ecosystem. The Tron ecosystem as of now has 4 wrapped tokens which can be separated into two.
- WBTC
- WETH
- WBTT
- WTRX.
- Wrapped token on BITGo
The First two wrapped tokens WBTC and WETH were Introduced by BITGo which is the custodian company for Wrapped tokens. Tron Blockchain was the second Blockchain used by BITGo to introduce wrapped token.
WBTC stands for wrapped Bitcoin token and represents the value of BTC on the Tron Blockchain. It has a 1:1 value with the native Bitcoin.
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WETH stands for wrapped Ethereum token and it represents the value if Ethereum on the Tron Blockchain. It also has a 1:1 value with Ethereum native token which is Ether.
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Complete operations of these two wrapped token is done by BITGo. The process of minting and burning the token to control price and regulate supply is carried out by BITGo. Complete transparency in operations is maintained and Verified by BITGo.
- Wrapped token based on Tron Blockchain
Just like Ethereum have produced a wrapped token called WETH to ease the interoperability of other coins on its Blockchain, Tron too have created a wrapped token to bridge interaction with other Blockchain network.
WTRX is the native wrapped token of TRX and represents a 1:1 value of TRX. It is a TRC-20 compatible token.
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WBTT is a wrapped TRC-20 token that is used to power features in the Blockchain network. WBTT can be swap to any other TRC-20 token. It represents the BTT currency and has a 1:1 value with BTT.
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What is to mint a Wrapped token?
Minting in crypto space is the process by which new coins are being created. This is not so different from that of wrapped token. Minting wrapped token is the process by which new wrapped tokens are created.
The minting process of wrapped token starts with the merchants institution and carried out by custodian institutions. Merchant institution are those institution in charge of receiving wrapped tokens and distributing them to the users.
Custodian are institutions that are in charge of minting wrapped tokens and solely have the power to generate keys that are used for minting these wrapped tokens.
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The minting process of wrapped token is basically in four Steps.
- Step 1. The minting process is initiated by the merchant.
- Step 2. The merchant then sends the coins to be wrapped to the custodian.
- Step 3. Using the special keys the custodian then mints the Wrapped token.
- Step 4. The custodian sends this token to the merchant as contract and the merchant then distributes the wrapped token.
What is burning a wrapped token? What is your function?
Contrary to minting tokens, burning is the process by which tokens are being converted back to their original token. The party that is permitted to burn wrapped token is the custodian. This is done in other to regulate the supply of Wrapped tokens, and to avoid double spending. Burning of wrapped tokens maintains stability.
Image source" *** **Create an example explaining the process.**
To explain the process of burning a coin, we will use BTC. Let's say, I want to carry out a transaction on the Tron Blockchain and I have BTC. We know BTC is not compatible on the Tron Blockchain and so I will need to convert my BTC to WBTC.
I will send my BTC to a merchant who will then send it to a custodian, let's day BITGo. The custodian on receiving the BTC will then block it and use the special keys to mint Wrapped BTC and send to the merchant who will send to me.
Now if I want my BTC back, I will perform the reverse process. I will send back my WBTC to the custodian in our case BITGo, who will generate a smart contract. Once the smart contract is signed, BITGo will unlock the BTC and will transfer the WBTC to an irreversible account. The WBTC token have been burned to prevent attack and double spending, maintaining stability.
Wrapped tokens is a vital part of the Blockchain technology. The creation of wrapped token has made it possible for Blockchain network to interact with each other increasing the interoperability. Wrapped token are very essential in the DeFi Exchange as the make transactions between Blockchains possible.
The central control of wrapped token creation by BITGo is a good idea, to maintain stability and transparency in wrapped token operation. However, it is a disadvantage as it goes against the reason of blockchain technology which is Decentralization.
I wish to thank professor @pelon53 for always bringing the best in his class. Wrapped token was a great lesson to learn and through the class and assignment, I now understand alot.
CC. Professor @pelon53.