Wrapped Native Tokens

Now that we understand the key differences between native tokens and ERC20s, we can explore native token wrapping - what it is and why it's necessary for blockchain ecosystems.

Wrapped tokens are blockchain assets that represent a native cryptocurrency (e.g., AVAX, ALOT, ETH) in a tokenized form, typically conforming to the ERC-20 token standard. Wrapping a native token allows it to be used in decentralized applications (dApps) and protocols that require ERC-20 tokens.

What Are Wrapped Tokens?

Wrapped tokens are created through a process where the native cryptocurrency is locked in a smart contract, and an equivalent amount of the wrapped token is minted. These wrapped tokens are backed 1:1 by the underlying native asset, ensuring that the value of the wrapped token mirrors that of the original native cryptocurrency.

This ERC-20 compatibility is crucial for enabling the native asset to interact with dApps, decentralized exchanges (DEXs), and smart contracts within the EVM ecosystem, where ERC-20 tokens are the standard. As we learned in the previous section, this solves the fundamental limitation where protocols cannot "pull" native tokens using transferFrom().

Why Are Wrapped Tokens Important?

Wrapped tokens play an essential role in interoperability within the EVM ecosystem, facilitating seamless use across decentralized applications and protocols. They directly address the limitations we discussed about native tokens:

• DeFi Integration: Wrapped tokens enable native assets to participate in DeFi protocols that require ERC-20 tokens. Remember our Aave example? Native ETH needs to be wrapped to WETH before it can be supplied to lending protocols.
• Protocol Compatibility: They solve the transferFrom() limitation by allowing protocols to "pull" tokens from user wallets, which is impossible with native tokens.
• Liquidity: Wrapped tokens increase liquidity in DeFi by enabling users to participate in protocols that require ERC-20 tokens, even when their original asset is a native token.
• Cross-Chain Compatibility: Wrapped tokens allow assets from one blockchain (e.g., Bitcoin) to be used on another chain, enhancing cross-chain functionality.

Wrapped Token Contract Interface

A wrapped token contract is typically an implementation of the ERC-20 token standard, with added functions for minting and burning tokens to facilitate the wrapping and unwrapping process. Here's a basic contract interface for a wrapped token:

interface IWrappedToken {
    function deposit() external payable;
    function withdraw(uint256 amount) external;
    
    function totalSupply() external view returns (uint256);
    function balanceOf(address account) external view returns (uint256);
    function transfer(address recipient, uint256 amount) external returns (bool);
    function allowance(address owner, address spender) external view returns (uint256);
    function approve(address spender, uint256 amount) external returns (bool);
    function transferFrom(address sender, address recipient, uint256 amount) external returns (bool);
}