Explaining Wrapped Tokens to newcomers to cryptocurrency
The term wrapping is the way to trade tokens across blockchains.
The dilemma
Cryptocurrency investors want to invest the tokens they own from one blockchain in applications on another blockchain.
Why is that a problem?
It’s important to state that cryptocurrency tokens are blockchain specific, so only those blockchains tokens can use the applications on that chain. For example only Ethereum tokens can be used to invest in or on applications on the Ethereum blockchain.
What does that mean?
If you want to invest in profitable opportunities on the Ethereum blockchain, you need an Ethereum token. But people owning tokens from other blockchains wanted to use their tokens in these profitable opportunities on Ethereum. Doing that is called Cross Blockchain or Cross Chain trading.
The Solution
The solution to cross blockchain or cross chain trading, for example, on the Ethereum blockchain, is a special type of Ethereum blockchain token which isn’t the native token called Ether, it’s a native token called an ERC20 token, and it represents a token from another blockchain.
Let me repeat that. Investors with tokens from another blockchain, like Bitcoin, or Hive, or Steem or Leo, those investors want to use applications on Ethereum. They can’t use those tokens on Ethereum, because they aren’t Ethereum blockchain tokens. So they must be represented by A Special Ethereum blockchain token, called a ERC20 token, which represents Bitcoin, Hive, Steem or Leo on the Ethereum blockchain. That ERC20 token is named after the non-Ethereum blockchain it represents like Wrapped Bitcoin, Wrapped Hive, Wrapped Steem or Wrapped Leo.
These are the digital representations on the Ethereum blockchain of tokens which are native to another blockchain.
Swapping your token for ERC20 Tokens
The next thing you need to understand, is that to trade your Bitcoin on applications on the Ethereum blockchain you need Wrapped Bitcoin and this means you need to find a developer or group of developers who create wrapped Bitcoin, which are ERC20 tokens which represent one Bitcoin. Then you trade your real Bitcoin for the digital representation or Wrapped Bitcoin and trust your Bitcoin to the Wrapped Bitcoin creator. They become the Custodian of your Bitcoin. This means your Bitcoin leaves your wallet and goes to your wallet. A security issue, so you must be sure you can trust the Custodian or risk losing your Bitcoin if they are a scammer.
Summary
That’s a brief explanation of wrapped tokens. Please ask your questions below in the comments, and feel free if this is your area of expertise or if you have illustrations, textual or graphic, which you wish to share, please do so.
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