As you are probably aware, different blockchains have different specifications for their tokens. This causes headaches when the tokens are incompatible, and the blockchains can’t talk to each other. We’ve all been there, trying to use tokens for one blockchain, but they are only compatible with a different blockchain? Would you like to use your BTC as collateral on a smart contract blockchain like BSC, to borrow against? Would you like to actively trade your ETH on BSC without the exorbitant transaction fees?
I have good news for you. Binance Smart Chain has a cool feature that allows you to “wrap” your native “non-BSC” tokens, for use on BSC. Binance saw an opportunity to fix a pain point, and developed their token wrapping system.
What is a wrapped token?
A wrapped token is a tokenized version of the other cryptocurrency. The value of the two are pegged, so 1 BTC will always equal 1 BTCb. You will always be able to redeem your collateral (unwrap) by giving back your tokenized/wrapped token. This system enables BSC to utilize thousands of different assets on it’s blockchain seamlessly.
Because blockchains are still in their infancies, there aren’t mature systems developed to allow information to move between them yet. Wrapped tokens, or the bToken system, increase interoperability between blockchains, essentially creating a cross-chain network. Ordinary users don’t have to worry about wrapping, and unwrapping tokens, and can simply buy and sell them like any other tokens.
How do wrapped tokens work?
Let’s use wrapped BTC as an example. Joe has 1 BNB in his BSC compatible wallet, and would like to have some exposure to BTC, so he heads over to Pancakeswap.finance and navigates to the trading interface, and trades BNB for BTCb. Joe now has exposure to BTC price action, even though he’s still on Binance Smart Chain.
BTCb is a BEP-20 token that is pegged one-to-one with the value of Bitcoin, allowing you to effectively use BTC on the Binance Smart Chain network. The way this process is made possible is complex. Wrapped tokens require a custodian to facilitate the wrapping and unwrapping process, and this custodian will hold an equivalent amount of the asset as the asset they are wrapping. This custodian could be a merchant, multisig wallet, DAO, smart contract or anything else. The custodian needs to hold 1 BTC for each 1 BTCb that is going to be minted. Proof of this reserve exists on the blockchain, and can typically be verified.
But how does this wrapping process work?
Lets say for example a wallet address sends 1 BTC to a custodian to mint a wrapped BTCb token. The custodian then mints the BTCb, on BSC, and secures the BTC used to create the BTCb. When the user wants his or her BTC back, they will put in a burn request to the custodian, and the custodian will burn the BTCb token forever, and return the BTC to the user, from its secure reserves. The custodian is the wrapper, and the unwrapper.
How do I wrap and unwrap tokens?
The most common way users are wrapping or unwrapping their cryptocurrency assets, like BTC, ETH, XRP, DOT, LTC etc., to be used on Binance Smart Chain, is by using the Binance Bridge. If you’d like more information regarding using the Binance Bridge, please see our guide on getting started with BSC here.
Every day BSC matures more and more, and new solutions arrive to improve access to BSC, one of those solutions that I have found to work very well, is SafePal Wallet. SafePal Wallet has a built in swap function that allows users to trade just about every token you can imagine, to BSC BEP-20 tokens, like BNB, BTC and others. More infromation about using SafePal Wallet to swap tokens can be found here.
Wrapping and unwrapping tokens does cost gas, however because BSC has extremely cheap transactions, the costs should be extremely cheap. If you would like more information regarding the Binance Bridge, please reference the Binance Academy article on the subject by going to https://academy.binance.com/en/articles/an-introduction-to-binance-bridge.
Benefits of using wrapped tokens
By allowing interoperability, wrapped tokens can increase liquidity and capital efficiency for both centralized and decentralized exchanges. Being able to wrap assets and use them on other blockchains can create more connection between isolated liquidity.
The other huge benefit is the reduction in transcation times and fees. Bitcoin and other assets have some wonderful properties to them, however they can be slow to send or receive, and can be expensive to transact. By wrapping the assets and using them on BSC, these issues are mitigated by using a blockchain with fast and cheap transactions.
Potential drawbacks to wrapped tokens
Like everything in life, nothing is all sunshine and rainbows. There’s usually a catch, when you wrap tokens, it’s no different. The vast majority of implementations of wrapped tokens require users to trust the custodian holding the funds. There are currently some decentralized options being developed that in the future may be able to offer completely trust-less token wrapping and un-wrapping.