Wrapped tokens are blockchain-based digital assets that represent the value of another cryptocurrency or real-world asset, enabling its use on a different blockchain where it is not native. These tokens are typically pegged 1:1 to the value of the underlying asset, which is held in reserve by a custodian or locked in a smart contract. Their primary purpose is to enhance cross-chain interoperability.
Mechanism
The operational architecture involves a process where the original asset is locked on its native blockchain or held by a trusted third-party custodian. Subsequently, an equivalent wrapped token is minted on the target blockchain. This process is reversible: burning the wrapped token on the target chain releases the original asset from its lock-up. This mechanism ensures the collateralization and redeemability of the wrapped asset.
Methodology
The strategic utility of wrapped tokens lies in unlocking liquidity and expanding the functional scope of assets across disparate blockchain ecosystems, particularly for those without native smart contract capabilities. They enable assets like Bitcoin to participate in decentralized finance (DeFi) protocols on platforms such as Ethereum, facilitating lending, borrowing, and trading. This framework provides a standardized method for asset migration and interoperability.
XRP's DeFi integration, fueled by legal resolution and institutional capital, enhances its utility as a foundational digital asset for cross-border settlement.
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