The local currency of the Ripple network is known as XRP. Ripple is a payment system based on blockchain technology and operates worldwide, offering crypto solutions to its customers. The crypto asset pegged with XRP is wrapped XRP (wXRP). In addition to the local XRP Ledger of the Ripple network, wXRP can be efficiently utilized on multiple blockchain networks.
The wrapped version of XRP has the same value as that of XRP Ledger, and it can be utilized for making settlements over the blockchain networks and for making financial transactions.
This guide article will comprehensively explain to the readers what wrapped XRP is, how they can buy it, and the use cases of wXRP. Moreover, it will also elaborate on the fundamental purpose of using wrapped XRP and how the users can store them safely.
What are Wrapped Cryptocurrencies?
The tokens that are utilized as cryptocurrencies on different blockchains except for the original blockchain on which they were created are known as wrapped cryptocurrencies. These wrapped assets are equal in their value to the original crypto asset.
This increases the utility of crypto assets by allowing different currencies, such as XRP, Ether, or Bitcoin, to be used on many other blockchains in addition to their original network.
The main goal of using wrapped crypto assets is to solve the cross-chain liquidity issues created due to decentralized finance (DeFi). The growth of any cryptocurrency becomes dependent on the demand for its tokens in that particular environment if the cryptocurrency is made to stay in its native chain. This might create a closed system for operating any particular currency.
However, this issue can be tackled by using the wrapped crypto assets that help increase the interaction between blockchains and crypto assets by providing blockchain interoperability. This creates multiple opportunities for decentralized finance (DeFi) to solve the liquidity issues among cross-chains and adds to the utility of any particular crypto asset.
Working of Wrapped Cryptocurrencies
There is a need for a custodian to wrap any token that holds it in its original form and then wrap it through a process known as minting. Then the token is sent to a blockchain network where it has to be operated. Moreover, the holder can also unwrap the wrapped tokens through the burning procedure.
After burning a wrapped token, it is transformed into its original form and sent to the original blockchain. The values of the original token and the wrapped token are equal when minting and burning are carried out. A wrapped token can be utilized on any blockchain efficiently while the original token is held back on the parent network.
What is XRP?
Ripple Lab Inc. is a technology firm based in the US that founded the Ripple network, a remittance network, currency exchange and system dealing with crypto settlements. The company founded the XRP currency, which is being used globally for making payments.
As it has become a lot more difficult and costly to send payments to different parts of the world, XRP is tackling this issue by facilitating customers to send large sums of money through fast and safe transactions. Therefore, the Ripple network has been primarily adopted by multiple banks in the United States and other countries.
What is Wrapped XRP (wXRP)?
XRP is a cryptocurrency operating on the local XRP Ledger and assisting in transactions over the Ripple network. In order to facilitate financial transactions or to exchange or invest crypto over the Ripple network, users can buy XRP. However, any transaction that has to be carried out on any blockchain network other than Ripple will utilize the wrapped XRP.
Therefore, the scope and utility of XRP have been increased multifold by creating wrapped XRP as it can be used on several blockchains in addition to the local Ledger. Users can transform XRP to create yield by utilizing the wrapped XRP on the Ethereum blockchain.
Moreover, they can also trade, stake, pool, use the Ethereum wallets, or create different DeFi games and upgrade their trading profiles.
Is There any Difference Between XRP and wXRP?
The ratio between the value of XRP and wrapped XRP is 1:1. This means that both XRP and wXRP hold equivalent values. As stablecoins such as Binance USD (BUSD) or the USD Coin (USDC) are pegged with the value of the United States Dollar, similarly, the value of wXRP is driven by the value of XRP.
The wrapped XRP is completely confirmatory and carries a custodian with it. It ensures that every wrapped XRP is backed up by an equal reserve of XRP. Therefore, a 1:1 ratio is followed by both methods, including wrapping and unwrapping of the token. However, except for the transaction charges, there are no other charges that the user has to pay.
The user sends his cryptocurrency to a smart contract by wrapping their XRP holdings. As a result, the smart contract provides them with a wrapped token. When anyone unwraps the wrapped token, the XRP that was stored initially is then returned. It is totally upon the owner if he wants to unwrap his wrapped tokens at any time.
Therefore, the user is provided with the facility to hold wXRP or the XRP token at any time per the conditions. Moreover, this also allows him to choose the blockchain network he wants to operate.
Working of Wrapped XRP (wXRP)
In addition to being used on the XRP Ledger, wrapping the XRP allows the users to utilize XRP on other blockchains. However, while dealing with wrapped crypto assets, a custodian is always required to check that the value of the wrapped version is the same as that of the original asset.
However, it depends on what kind of custodian the user chooses. It may be a simple code rule, a multi-signature wallet, a smart contract, or a decentralized autonomous organization (DAO). The crypto asset is then wrapped by the custodian through the minting process.
Taking the token back to its original version is known as burning. Smart contracts are usually used as custodians in the case of XRP.
Whenever a user wraps his XRP holding, he is provided with the wrapped version of the token by the smart contract that can be efficiently utilized on any other blockchain.
On the other hand, the smart contract stores the original XRP with it and is returned to the cycle if the holder decides to unwrap his XRP holdings. This again adds the original version of the token to the existing blockchain network.
The peg is maintained when each wrapped XRP is backed by an XRP in the original reserves. The trading arbitrage pegs the price value. If the value of the wrapped XRP decreases below the value of the original XRP, traders will find an opportunity to earn profit arbitrage. For this purpose, he may purchase wXRP at a lower price and then sell it to earn a profit.
However, the supply of wrapped XRP reduces when the demand for wrapped XRP increases. This increases the price of the token and helps in reaching the desired value of the peg.
On the other hand, if the cost of wrapped XRP increases above the price of XRP, it increases the trading pressure to sell wXRP. This increases the supply of the token and results in the reduction of price till the price ratio of 1:1 is reached.
What is the Need for Wrapped XRP (wXRP)?
There are several benefits of wrapping XRP that may prove helpful for the users. A few of them are discussed below.
Blockchain interoperability can be increased for the XRP holders by wrapping XRP. Therefore, the users can gain multiple benefits on different blockchain networks using the wrapped asset.
Moreover, it also creates the opportunity for the XRP holders to earn more profit and gain more returns by providing them with an opportunity to utilize the services provided by different decentralized applications and decentralized finance protocols.
An increase in liquidity is one of the most significant benefits that is gained through using wrapped tokens. There are several centralized and decentralized exchanges where XRP can be utilized as a popular crypto asset. Therefore, ensuring liquidity in the chain creates several opportunities for the XRP holders to upgrade their trading profiles.
A number of options are provided, mainly in the developed decentralized space of Ethereum. In addition, many pool pairings for wrapped XRP are offered by centralized exchanges such as Binance and many decentralized exchanges such as SushiSwap and UniSwap. These tokens can be used further for lending, staking and swapping purposes.
How Can Wrapped XRP (wXRP) Be Used?
As the crypto ecosystem is expanding each day, the use cases of wrapped XRP (wXRP) also increase. Two of the commonly used application of wrapped XRP are discussed below.
- DeFi Lending
As wrapped XRP can conveniently operate on other blockchains except for XRP Ledger, it becomes easier for users to lend and borrow it. Moreover, it can also be used by the XRP holders on decentralized finance lending protocols such as Compound, MakerDAO, Aave etc.
- DeFi Trading
Native crypto traders usually prefer margin trading as it increases their chances of potential profits. Therefore, DeFi traders can use wrapped XRP on different decentralized exchanges for trading margins.
In addition, several developments are being made using wrapped crypto assets in loan collaterals, automated market maker pools, yield farming, and many other fields. However, the applications of wrapped crypto assets will continue to increase as interoperability, and cross-chain liquidity is improved.
Process of Wrapping and Unwrapping XRP
It is vital to wrap XRP if the user holding XRP aims to use his crypto asset on any blockchain other than the Ripple network. One of the leading platforms providing wrapped cryptocurrencies in the market is Wrapped.com from TokenSoft. The platform provides its services to the customers that would facilitate them in wrapping and unwrapping XRP.
Moreover, it collaborates with Hex Trust to act as a custodian providing the infrastructure for mobilizing wrapped XRP on the Ethereum blockchain network. Wrapped.com also elaborates the users about the details of conversion from one form to another and helps them create an account using the Typeform provided on the website.
However, users can use a MetaMask wallet for SushiSwap as direct integration is offered by wrapped.com. In addition, alternate wrapping service providers can also be used to wrap XRP on different blockchain networks. These service providers may include ApexSwap, which creates a connection between XRP Ledger and Avalanche.
Can Wrapped Tokens Be Considered Safe?
The efficiency and usefulness of crypto assets have been increased manifold by wrapping them. Users can carry out transactions safely as there are multiple protocols, such as Ethereum operating, that help convert wrapped crypto into ERC-20 tokens. However, the custodian that checks the underlying asset is considered one of the significant flaws of using wrapped tokens.
In case the custodian becomes rebellious and allows someone else to access the original XRP token by unlocking and releasing it, it may result in a significant loss for the original XRP holder as he would be left with nothing in hand than a worthless asset. Therefore, one should choose a trusted party as a custodian as it is considered a centralized entity in this transaction.
While dealing with XRP tokens, the leading digital asset custodian of Asia has been chosen by the Ripple network named Hex Trust.
Moreover, to ensure the safety of the token, specific insurance and backup guarantees are also provided by different networks and their custodians. This helps in the elimination of illicit activities from the transaction procedures to a maximum extent.
However, the developers and experts are keen to explore the bridges managed by decentralized smart contracts and consider it an important topic of discussion in the crypto world, as wrapped tokens have gained an essential position in the decentralized finance space.
Advantages of Using Wrapped Tokens
There are several advantages that are being provided to the holders of wrapped tokens. A few of them are discussed below.
- Enhanced Security
As the user gets control over the private keys to his wallet, wrapping any crypto asset adds to the safety and security of an asset. Moreover, custodians such as smart contracts, multi-signature wallets and DAOs also choose more secure and regulated exchanges.
- Transaction Speed
Wrapped tokens provide fast transaction services to their owners that are considered a significant benefit by the users. While using any blockchain network, buying or selling an asset may take an ample amount of time.
However, using wrapped tokens solves this issue by making transactions quicker. The highly volatile nature of the crypto market makes it essential to save time in every manner and strive for fast transactions.
Wrapped tokens have provided the opportunity for holders to use their Bitcoins on the Ethereum network due to increased cross-chain interoperability. One can not only carry out easier transactions using wrapped tokens but it can also be utilized to get multiple services, such as launching and operating decentralized applications or services.
The utility of crypto assets can be increased by enhancing their liquidity. Moreover, using the wrapped version of an asset, one can also increase the capital efficiency for all kinds of assets, whether decentralized, such as crypto assets or centralized, such as fiat currencies.
- Transaction Charges
As the transaction time is reduced by using wrapped tokens, it ultimately decreases the transaction charges for any transaction activity.
Disadvantages of Using Wrapped Tokens
However, some drawbacks attached to using wrapped tokens are elaborated on below.
The main aim of using crypto assets is to function in a decentralized environment. However, a custodian provides the wrapped tokens to the holders, thus making them subject to centralization. It has been declared by the founder of the Ethereum network that wrapped tokens are a centralized entity as they are created in a central environment.
This is because the central authority helps to mint a wrapped token instead of the blockchain directly.
- Reliability of the Custodian
Choosing a reliable custodian is very important before carrying out any transaction. Although the system of wrapped tokens is now developing to minimize the role of custodians in any transaction, it still exists. In order to wrap or unwrap any token, a custodian is required. Therefore, the whole transaction can become faulty if the custodian does not accurately perform his duty.
- Charges for Minting
One of the significant disadvantages of using wrapped tokens is the cost integrated with the minting process. When the holder wraps or unwraps his token, it consumes a certain gas fee that ultimately results in slippage.
Wrapping crypto assets is a significant step that aims at improving liquidity and interoperability among different blockchains. Using different wrapped tokens on different blockchains provides several benefits to decentralized applications.
An XRP holder can have several opportunities to explore the efficiency and utility of wrapped tokens that can now be conveniently accessed through the Ethereum blockchain. However, it is always advised to choose a reputable platform with a trustworthy custodian and always invest in a trusted wrapped asset.