Known among crypto users as platforms and protocols which replicate existing financial services using crypto or blockchain technology, decentralized finance (or “DeFi”) can limit the use of centralized systems. “An umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries,” stated CoinDesk to define DeFi. While “an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms, such as the Ethereum blockchain” is what Fabian Schär defines DeFi more specifically.
To work the operation they provide, DeFi has various protocols categorized, such as on-chain asset exchanges, loanable funds markets for on-chain assets, stablecoins, portfolio management, derivatives, and privacy-preserving mixers. And the wrapped coin is the subculture of on-chain assets exchanges. They hosted currencies in the blockchain having the same price as their underlying assets. In other words, it is called decentralized exchange (DEX).
Decentralized exchanges (DEXs) are a class of DeFi protocols that facilitate the non-custodial exchange of on-chain digital assets. Apart from being non-custodial, i.e., the exchange does not have ownership over a user’s funds at any point in time, a DEX settles all trades on-chain, thereby ensuring public verifiability for all transactions to network participants. While DEXs initially only supported assets native to the chain on which they operate, wrapped tokens, such as wBTC have enabled DEXs to overcome this limitation.
What is the benefit of Wrapped Coins?
Wrapped coins provide benefits to the holders of assets that are otherwise incompatible with DApps to invest them profitably in these projects as they work in 1:1 ratio crypto-based. The in-custody amount should be an equal circulating supply of wrapped tokens, else the peg isn’t full and could lead to big problems in case of massive unwrap (like a good old bank run). The market is also growing rapidly thanks to the large supply of tokens suitable for DeFi users as a result of token wrapping.
What is the down-side of Wrapped Coin?
Of the tantalizing advantages of wrapped coins, there is one downside. However, those flaws are crucial enough that the stored wrapped coin can be worrisome. “The trustworthiness of many of the coins offered in exchange for wrapped versions is questionable,” said Vitalik Buterin, the inventor of Ethereum. Since decisions about wrapped assets are thus made centrally, there is a risk of market consumption and possible biased abuse of power. In other words, wrapping cannot be automated via a smart contract on the blockchain. Instead, the wrapping is usually done instantaneously via a central program, which is therefore open for manipulation.
But, long story short, moving from relying on centralized systems, wrapped tokens came as a solution to current cryptocurrencies’ problems. Wrapped tokens exist to simplify activities, especially when trading between currencies, and providing a universal omnibus for exchanging them. By using wrapped tokens, DApps also can process transactions much faster because they are done on a single blockchain. Well, there is much to dig in still for more future benefits.