Imagine if you are watching a space thriller, the astronauts are going through an asteroid feels, and their ship is getting damage. They need to get out there to repair their ship. The bravest astronaut volunteers for the job. So what they gonna do?. The really important thing here is to put on a space suit. People are usually best suited to beyond earth breathing some crips pure earth air not dying in a vacuum of space. To summarise this they wrapped themselves up to be able to survive in the different environment.
So what exactly is a wrapped token ?
The many different layers and situations can make this concept confusing but at its most basic, a wrapped token is just an asset, you can take an asset wrapped it up and you can use it on a different blockchains.
For example,
Wrapped AVAX or WAVAX, is a token that represents AVAX 1:1 and conforms to the ARC20 token standard. By conforming to ERC20, it allows for increased functionality across any application that handles ERC20 tokens. You can always convert your WAVAX to AVAX 1:1 and vice versa.
To really understand this you first needs to understand how coins work. Each blockchain has its own coin but the developer on that blockchain can create their own tokens.
So what are the benefits of wrapped Avax ( WAVAX)
But the problem is tokens are tough to use on different blockchains. For example, say you want to deposit some Avax on a popular blockchain application called AAVE. I have already written a entire article on this but it's basically an application that allows you to earn an interest rate by lending out your crypto. However AAVE isn't available on each network. So what will you do? Here, you can wrapped up your Avax and make it a token on another network called wrapped Avax.
What you really doing is locking up your true Avax and then you simply get a wrapped Avax as a token on another blockchain to use then you have that wrapped Avax on that network, but it's actually a representation of your original Avax. The point of all of this is that some blockchain can do things that other can't and some coins aren't even available. So what are th early developers do?. They may use the representation and called them a wrapped tokens. So that you can essentially have main coin that you can use it on any other network.
A good way to think about using a wrapped token is similar to collateral. Imagine you are trying to buy a house and you don't have enough money for it. So you give it what it is called mortgage. If you have something else which has value you can take a loan on it, because the Bank or party loaning a money knows that you have something valuable that they can take if you don't pay them.
A wrapped token is similar to this. Wrapped tokens are pretty similar to stablecoins or cryptocurrencies that are pegged to the ARC20 currencies which has valued. A wrapped token like wrapped Avax retains the value of the wrapped assets and in this case 1 wrapped Avax is equals to 1 Avax. Stablecoins preety much to the same thing. They are basically wrapped currencies which are use for the improved transaction and efficiency.
How you can do this? Well, if you are on wrapped Avax you can actually turned it into the real Avax at any time. So wrapped Avax are one hundred percent actually pegged by real asset that they are representing. This way traders are incentives to keep the price of the wrapped token the same as the real coin.
Now depending on which coin you have and which blockchain you want to use. The benefits of wrapped Avax can vary, but if you have a wrapped Avax with a slow blockchain and want to make the transaction done faster wrapped Avax can be an advantage. For example, a blockchain like Ethereum clears blocks quicker than bitcoin which ofcourse provide the speed advantage to the user of the blockchain.
Avalanche is even faster than Ethereum and native coin is Avax. So many users use wrapped Avax called WAVAX on the Ethereum blockchain to do the things they normally do on the Ethereum blockchain but much quicker and much lower fees.
So what actually happens to the wrapped Avax when it's done being used ?
Just creating a another asset of the same value means you are just dubbling your money. First wrapping your Avax does not mean you are any richer than before. Also because of the security and double spending issues that can potentially arise from this. There's ofcourse has to be a solution called Custodian. Now this Custodian is a third party, it could be a Smart Contracts, another person, DAO or many other things. The point is you have to have a way to verify that you have certain amount of the Avax that you say that you have. In this way nobody can create a wrapped Avax based on the coins that they don't have.
The custodian verifies the person creating a wrapped Avax actually has the original valuable collateral Avax. In short someone has to take your real Avax and then give you a corresponding amount of wrapped Avax. If someone comes up with wrapped Avax so that Custodian can give them a real Avax.
So basically it's done with a code. It's not a real person so we don't have to trust someone who run away with all our real Avax or print a tons of fake wrapped Avax.
Can there be more wrapped Avax than real Avax?
In short the answer is no. In the same way that there can only be 720M Avax, so there can only ever be 720M wrapped Avax because you have to verify that you only have Avax first in order to mind a wrapped Avax. Once you wrapped your Avax, traded and then transaction is over. The wrapped Avax is given to the person you sold it too. Eventually that person might come back to the Custodian and say I wanna real Avax. The Custodian will take their wrapped Avax and give him a real Avax, and then distroy a wrapped Avax forever.
Who ever uses wrapped Avax?
With the example we have seen so far is a simple one wrapped Avax. The share of Avax being use for wrapped Avax is approximately increasing 1% . This is ofcourse not a massive amount but it's steadily increasing as the demand for Avalanche network and dapps is increased over a time. It seems to be the case as DeFi grows in Avalanche ecosystem the demand for wrapping all coins for coins to use on Avalanche also growing.
Conclusion
Wrapped tokens may seem like a simple idea that just let people improve how they make transaction but the problem that solves is much bigger. Interoperability or the ability to easily move between blockchains is being very important and recurring problem to be solve, as the entire DeFi landscape expands. Wrapped tokens are certainly a valuable solution that is only becoming more popular.