Ethereum

Since the dawn of the crypto industry, blockchains’ ability to communicate with each other has been limited by architecture constraints. Wrapped tokens solve this problem by taking a token from one chain and issuing its “wrapped” version on the other chain. This clever hack opens up new frontiers for cryptocurrency’s booming DeFi movement, although the issuance of wrapped tokens, as we will see later on, can pose significant security risks to the entire ecosystem. However, just as in the case of the blockchain trilemma, some tradeoffs have to be made.But before we dive a bit deeper into how wrapped tokens are created and what risks they may pose for the DeFi ecosystem, let’s first look at what they aim to solve — the problem of blockchain interoperability.<h2 id="header-0">The holy grail of DeFi: cross-chain interoperability</h2>Essentially, blockchains can be thought of as <a href="https://coinpaper.com/797/it-s-not-all-about-blockchain-5-alternative-distributed-ledger-technologies" rel="noopener noreferrer nofollow">distributed databases</a> that are shared and updated by multiple nodes in a peer-to-peer network. Each node on the network carries a copy of all recorded and stored transactions and updates the record each time a new block is added to the chain.To transact on the blockchain, one has first to set up a crypto wallet, which is an application that offers users a simple interface to interact with the network and a point for access to their digital assets. However, it’s important to understand that a crypto wallet doesn’t actually store cryptocurrencies like your physical wallet holds cash or credit cards. Instead, it holds the public and private keys that enable you to access and trade your coins that live on a blockchain. Basically, a crypto wallet stores cryptographical proof that you own your crypto, and how much of it. Once it is lost, there’s no way for you to move your funds from the network.Now that we know that coins sit on the blockchain, it becomes much easier to understand the role of wrapped tokens. Since each blockchain is a separate database that doesn’t exchange information about your balance and transaction history with other networks, you can use your coins only on the native chain. Bitcoin sent to the Ethereum wallet (and vice versa) won’t be received by the intended recipient, and, what’s worse, will be lost forever.When Satoshi Nakamoto created Bitcoin in 2009, blockchain was a nascent and experimental technology that very few — if any — people envisioned to become the foundation for a one trillion dollars worth industry in 2023. Having its origins as a niche product for cypherpunks and libertarians, Bitcoin wasn’t built for a future where multiple blockchains need to facilitate cross-chain transactions. And neither were the subsequent blockchains. READ MORE ON <a href="https://coinpaper.com/860/what-are-wrapped-tokens-and-why-do-we-need-them-in-de-fi" rel="noopener noreferrer nofollow">COINPAPER.COM</a>

What are wrapped tokens and why do we need them in DeFi?

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