Wrapped tokens are digital currency that is used to keep the value or price of a particular token to another token. Since cryptocurrency is a digital currency that makes use of a technology called blockchain, this technology does not allow a token running on a particular blockchain to operate on another blockchain. For instance, transactions involving Bitcoin can not be done on the Ethereum blockchain because both have different capabilities and functionality.
With the introduction of wrapped tokens, the bridge between various blockchain was made possible. Bitcoin can now operate on the Ethereum blockchain with a wrapped token known as WBTC (Wrapped Bitcoin). Wrapped tokens provide a consensus between different blockchains such as Ethereum to Binance Smart Chain, Ethereum to Bitcoin, and many more like that.
Wrapped Bitcoin for instance is a tokenized version of Bitcoin that helps to keep the value of Bitcoin against another token on another blockchain and it can always be unwrapped at any time. It made it possible for users to use Bitcoin on the Ethereum blockchain through the help of a custodian( smart contract, DAO, or multisig wallet).
In this case, Bitcoin is sent to a custodian to mint WBTC on Ethereum blockchain based on the amount of BTC sent, and to unwrapped the BTC, a burn request is sent to the custodian again and the BTC is released at the same value to the WBTC. Although many refer to USDT as a wrapped version of USD, this is not real because they don't hold the same value to one another.
Just as we all know there are two sides to a coin, wrapped tokens come with lots of advantages and disadvantages depending on how an individual sees it. For instance, wrapped tokens help to speed up transactions on blockchain that have slow block confirmation. An example of this is Bitcoin, despite regarded as the father of cryptocurrency, transactions on the Bitcoin blockchain are not as fast as on BSC and by wrapping Bitcoin on BSC, that can help to speed up the transaction.
Some of the disadvantages that come with wrapped tokens go thus; firstly, there must be trust regarding the custodian holding the token and the minting process may also come with a high gas fee which many users may not be able to afford.
