Wrapped assets arose from a need for blockchains to talk to one another to move and exchange data – in essence, to become interoperable. However, due to their fundamentally different algorithms and protocols, blockchain communication isn’t straightforward. Wrapped assets can act as bridges that interconnect assets, allowing different blockchain networks to connect and promote seamless interaction between cryptocurrencies.
Wrapped assets are created by locking up the underlying asset in a digital vault known as a smart contract and then minting a new token that represents the same value. When this happens, a brand-new wrapped token is born that can be used within the target blockchain’s ecosystem. Think of wrapped tokens as versatile representatives; they are a type of cryptocurrency that is pegged to the value of another asset. For example, a wrapped Algo (xALGO) is a token backed by 1 Algo in the same way that 1 wrapped Bitcoin (wBTC) is backed by 1 BTC.
The example above uses cryptocurrencies (fungible tokens), but wrapped assets can also represent collectibles, commodities, company shares, traditional currencies, and even real estate. For example, you could potentially own NFTs (non-fungible tokens) that live on the Ethereum blockchain, and through wrapping these assets, you could put them to use on an Algorand DeFi app or in an Algorand-based game.
Algomint was the first bridge built for Algorand and it enables users to wrap ETH, BTC, and stablecoins and use them on Folks Finance, Tinyman, Pact, and HumbleSwap. These assets are locked in secure vaults and can be redeemed at any time. BTC becomes goBTC and ETC becomes goETH on a 1:1 basis. Messina also brings cross-chain interoperability to Algorand between Cronos and Ethereum, and soon Polygon and Binance Smart Chain. These Messina bridged assets can be used in the DApps mentioned above for Algomint and others, including Gard, Algorai, and Humble DeFi. Messina bridge users must ensure assets like BTC are wrapped ahead of bridging them over to Algorand. This can be done through a swapping service in a BTC wallet or through a DEX like Uniswap; the same applies to ETH with a respective ETH wallet. Messina users receive wBTC in their Algorand wallet after using the bridge. Messina is also looking to bring NFT bridging support to Algorand soon.
Wormhole is another interoperability protocol that enables blockchain users to move assets, apps, and data across chains. Unwrapped tokens (BTC and ETH) are wrapped and bridged through Wormhole’s Portal Bridge, where they are locked in a smart contract and a new Portal-wrapped version of the token gets minted on the destination chain. Users then receive wBTC and wETH in their Algorand wallet. Wormhole launched support for Algorand in May 2022 and also works with many other well-known blockchains.
Algomint is a custodian, or trusted, bridge that requires users to sign up with an email address and verify it. Its point of centralization means that Algomint is responsible for safeguarding the assets. Algomint entrusts users’ assets to a custodian, which in this case is copper.co, a reputable digital asset custodian. Algomint's Gitbook also states, “For product v2 onwards, we will introduce on-chain smart contract custody to decentralize the operation.” Both Messina and Wormhole are working to deliver trustless bridges, where a smart contract holds the original assets. These bridges use something called a guardian network to validate and authenticate the transactions being passed between the different blockchain networks.
The benefit of bridging assets is that you get to try out a whole new ecosystem, filled with different opportunities. Let's say you want to explore Algorand for the very first time but you only hold Bitcoin. You can easily wrap your BTC assets to bridge them across to Algorand and gain access to a new ecosystem of DeFi services. When you’re finished, you can bridge the assets in the other direction to redeem them in their original currency. Another benefit of wrapped assets is that transactions can be faster and cheaper. For example, using wBTC on Algorand would result in lower transaction fees and higher speeds than using the BTC network.
Wrapped tokens can bring more liquidity to a DeFi ecosystem. In May 2023, Folks Finance announced a new cross-chain solution: xALGO. Developed using Wormhole, xALGO allows Algorand Governors to bridge from Algorand to BNB Chain. BNB and Binance users can easily access the Algorand ecosystem and participate in Governance on Algorand, while Algorand Governors can use their xALGO within the BNB ecosystem without sacrificing their Algorand Governance rewards. What’s more, the added flexibility will incentivize more users from outside of the Algorand ecosystem to take part in Algorand Governance.
Wrapped tokens work within the Algorand ecosystem, as well as beyond. Take gALGO for example, this is a wrapped token available on Folks Finance as part of Algo Liquid Governance. It allows users to participate in Algorand Governance without locking up their liquidity. Users can swap their Algo to gALGO in order to commit it to Algorand Governance. The added benefit is that this gALGO can also be used across the Algorand ecosystem.
Ultimately, as DeFi matures, it is becoming increasingly clear that blockchain and platform interoperability is important for its future. Of course, wrapping and bridging are the first steps but the experience could still be more seamless. On a recent Twitter Space, Wormhole CEO Robinson Burkey said: "We want to move to a world where you don't necessarily know you're bridging because it's so safe and so abstracted from the experience.” With its benefits of wrapped assets and bridging already emerging in the Algorand ecosystem, it’s likely they will become an integral part of blockchain being used in the real world and we won’t even notice.
Read next:
Why the Future of Gaming Is Built on Blockchain
How Blockchain Is Disrupting the Real Estate Industry
Disclaimer
The content provided in this blog is for informational purposes only. The information is provided by the Algorand Foundation and while we strive to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained on the blog for any purpose.
The content of this blog is not intended to be financial advice. You should not take any action before conducting your own research or consulting with a qualified professional. Any reliance you place on such information is therefore strictly at your own risk.
In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this blog.
Through this blog, you may be able to link to other websites which are not under the control of the Algorand Foundation. We have no control over the nature, content, and availability of those sites. The inclusion of any links does not necessarily imply a recommendation or endorse the views expressed within them.
Every effort is made to keep the blog up and running smoothly. However, the Algorand Foundation takes no responsibility for, and will not be liable for, the blog being temporarily unavailable due to technical issues beyond our control.