Wrapped Tokens: The Last Piece Of The Puzzle

Wrapped Tokens: continued from blockchain bridges (discussed last week)

It’s a safe bet that most people, at least once in their lives, have tried to solve a jigsaw puzzle. Whether at school, on a lazy afternoon at their grandparents, or even at the kitchen table on a rainy day, chances are most have sat down at some point, opened the jigsaw box, spread the pile of pieces out evenly, and then set about arranging them in the correct order. It’s an activity that rewards patience, precision, along with a healthy dose of persistence. It also teaches us to recognise the role the last jigsaw piece plays in completing the puzzle.?

With a jigsaw puzzle chance decides which piece will complete the puzzle but in most systems this decision is deliberate, even if it’s not known at the outset. And when it comes to the interoperability of a system this last piece is vital. In our last article we spoke about blockchain bridges and their role in the interoperability of blockchain ecosystems. We also mentioned briefly one feature that was vital to the functionality of the bridges themselves: wrapped tokens. By returning now to our island example we can explain how wrapped tokens work and why they are so important.

In our island example the initial problem was that each island was isolated from other islands. Blockchain bridges solved this problem by connecting the islands with each other. Now, if you lived on Bitcoin Island you could visit Ethereum Island, and vice versa.?

In reality, though, this connection only solves half of the problem. The other half of the problem emerges once the bridge is crossed. It emerges because each blockchain has its own currency, one that is incompatible with any other blockchain. For example, if you make the trip from Bitcoin Island over to Ethereum Island to buy food from their markets you can’t use bitcoin. You will need to see a currency exchange and have your bitcoin converted into ETH (Ethereum’s native currency), a process that is slow and which incurs fees.?

Enter wrapped tokens. A wrapped token is a cryptocurrency coin that is pegged (tied to) in value to another cryptocurrency. The reason it’s called a wrapped token is because the original token is essentially wrapped-up (imagine a kind of digital vault where it is locked away). When the original token is wrapped another token is created, one that is compatible with another blockchain. This process is fast and cost effective and removes the need for currency conversion.?

To illustrate this, imagine there’s a toll booth at the halfway point of the bridge. When you reach this booth, rather than pay a toll to continue (like you would in real life), you hand over a certain amount of money (an amount of your choosing) that the booth converts into an equivalent amount of tokens you can then spend on the other island. Instead of the conversion being final, though, the booth will hold secure the amount you handed over until you return. When you return the booth will hand your money back, and in the process destroy the tokens you return with. In reality, this means, for example, that you don’t have to sell your bitcoins to interact on the Ethereum blockchain, a feature which has enormous appeal for users.?

While the focus of this article has been to explain the importance of wrapped tokens, it would be wrong to think they deserve all the attention.? A system as a whole, like any jigsaw puzzle, is always greater than the sum of its parts. This sentiment is especially true for blockchains, and one that should remain front of mind as we further develop the ecosystem.?