What is Wrapped XRP (wXRP) and How Does it Work?

Introduction

Managing and investing in crypto assets can be error-prone, primarily because of the complex nature of handling a cryptocurrency portfolio. A standard portfolio for a crypto investor often consists of diverse coins and tokens spanning different blockchain networks. However, without an interoperable blockchain, it can be quite challenging for an investor or trader to effectively manage these assets.

The need for interoperability in blockchain has led to the introduction of wrapped tokens. Wrapped tokens can be used to bridge coins from one blockchain to another. This process involves creating a representation of the original token on another blockchain, enabling users to access decentralized apps across multiple blockchains through the wrapped tokens.

The concept is not entirely novel, as wrapped versions of Bitcoins (BTC) and Ether (ETH) have been present on decentralized finance platforms and exchanges. And just recently, XRP joined the roster, with wrapped XRP becoming part of the array of wrapped cryptocurrency tokens.

Understanding Wrapped Cryptocurrencies

When a token operates as a cryptocurrency on a blockchain different from its native one, it becomes known as a wrapped cryptocurrency. Wrapped cryptocurrencies are a mechanism that enables tokens to seamlessly integrate into another blockchain that is different from the blockchain it was built on. The price of a wrapped cryptocurrency remains on par with the original cryptocurrency (that’s 1:1). With wrapped tokens, cryptocurrencies like Bitcoin, Ethereum, and XRP can be used on other blockchain networks, thereby increasing their utility.

The problem wrapped cryptocurrencies aim to solve is decentralized finance cross-chain liquidity.

Source: Lossless

Just like in the natural economic system, when a nation opts to limit foreign trade, its growth becomes confined to its internal economy. Essentially operating a closed system. Likewise, within the blockchain space, if each cryptocurrency remains isolated in its ecosystem, growth is constrained solely to the demand within that ecosystem, resulting in a closed system for the cryptocurrency.

Wrapped cryptocurrencies offer a remedy to this issue by establishing an interoperable blockchain across various cryptocurrencies within the DeFi ecosystem. Through the use of wrapped cryptocurrencies, there is enhanced cross-chain liquidity and increased utility for crypto assets.

Source: MDPI

XRP cannot be spent on the Ethereum network, nor can Ethereum smart contracts be utilized on the XRP network. However, when a wrapped version of Ethereum is created, it can easily communicate on other blockchains besides its native blockchain. Wrapped cryptocurrencies are a step towards interoperability.

What is Wrapped XRP (wXRP)?

Wrapped XRP, a token backed by XRP, extends its utility to blockchains beyond the XRP ledger through the Ripple protocol. It is designed to provide users with smooth value transfer in network transactions and is accessible on both centralized and decentralized exchanges (CEX and DEX). Also, users can utilize this token to procure goods and services from Ripple partners.

Ripple is the technology company behind XRP, the native token of wXRP. It operates a distributed global system designed for seamless payments and cross-border transactions. XRP serves as the primary token within the Ripple network, offering businesses a swift and cost-effective solution for international money transfers.

Wrapped XRP was birthed by an independent team not directly affiliated with Ripple, yet it’s important to note that wXRP is securely backed by XRP tokens despite its independent development. When XRP is wrapped, it remains essentially identical to a regular XRP. This equivalence allows a one-to-one (1:1) exchange between wrapped XRP and the regular XRP held in a reserve by a custodian who manages the process of wrapping and unwrapping.

Wrapped tokens emerge from the necessity for interoperability across blockchain networks. The concept does not inherently mean wrapped tokens are distinct from their regular tokens; rather, it serves as a means to promote diversification and interoperability within the decentralized apps (DApp) ecosystem.

Notable Custodial Wrapping Platforms

Wrapped.com

Wrapped.com is a website operated by Tokensoft that allows users of various tokens the access to wrap and unwrap their tokens. It is a cross-chain designed for high performance, speed, and ease in wrapping and unwrapping tokens. Wrapped.com has previously wrapped a range of tokens including Bitcoin, Ethereum, Zcash, and Filecoin, among many others.

The genesis of Wrapped.com began with a collaboration between San Francisco-based Tokensoft and Anchorage, the U.S. regulated crypto custodian. These collaborations between the two firms led to the creation of wrapped versions of nine digital tokens. Wrapped.com has expanded beyond its actual operations, taking a multi-custodian approach to provide interoperability across different chains. Hence, bridging to a wider array of digital assets and tokens.

Holders of XRP can easily access Wrapped.com’s website, following the process to either wrap or unwrap their crypto assets. The website provides more utility, leading to more demand for cross-chain transactions.

Similarly, XRP can be wrapped on other blockchains using alternative wrapping services. An example is ApexSwap, a wrapping service provider that connects Avalanche to the XRP ledger.

ApexSwap

Ripple, the technological company behind XRP, partnered with Apex Foundation to take XRP to Avalanche through a fully insured Apex bridge built by Apex.

The role of Apex is to facilitate the transfer of XRP from Ripple XRPL to Avalanche and various other networks running on the Ethereum Virtual Machine (EVM). The bridge is subject to consistent audits and penetration tests to ensure a smooth run. It also supports other DEXs through API access kits to allow integration with DeFi protocols.

This collaboration between Ripple and Apex Foundation led to the launch of Wrapped XRP (wXRP) on ApexSwap, first in the Avalanche ecosystem, and eventually on the XRP ledger.

Are Wrapped XRP and XRP the Same?

As stated earlier, wrapped XRP is not categorically different from the native XRP token. However, a few distinct features set them apart. These features are summarized below:

Pegged Value

Wrapped XRP is pegged to the XRP token. This feature is similar to how the BUSD is pegged to the US dollar. The reason for this feature is to help the token maintain its value.

Ratio 1:1

The ratio of wXRP to the native XRP token is 1:1. This means that for every XRP wrapped, another XRP is unwrapped. Hence, facilitating a direct correlation between the two cryptocurrencies.

Collateralization

wXRP is collateralized and kept securely against potential theft or loss. This collateralization is done through a custodian (smart contract) who ensures that for every wXRP token in circulation, there is an equivalent token stored in its account as support.

Wrapping Process

To wrap an XRP, it has to be sent to a smart contract which would in turn issue an equivalent amount as a wrapped token. This wrapped token can then be sent to any blockchain that supports the ERC-20 standards, that is Ethereum.

Freedom to Unwrap

Users of wXRP can decide to unwrap their tokens at any given time. The process of converting the wrapped token to another blockchain asset is at the user’s discretion.

With this feature, users are not worried about exchange rates when exchanging XRP tokens.

Why do we need to Wrap XRP?

Source: JoelKatz on X App — Wrapped.com allows the trading of wXRP on its platform

When an XRP is wrapped, it provides benefits for the XRP holders. The following are the benefits XRP holders would enjoy from wrapping their XRP:

Enhancing Interoperability

One key benefit of wrapping XRP lies in its promotion of interoperability across blockchain networks. This means that XRP holders aren’t confined to a specific blockchain ecosystem; instead, they can explore trading possibilities across diverse blockchain networks. Moreover, it broadens access to services offered by various decentralized applications (DApps) or DeFi protocols, enabling more effective utilization and potentially higher returns. As an illustration, an XRP holder may choose to stake and utilize their tokens within the Ethereum DeFi ecosystem, leveraging its substantial and well-established framework.

Enhancing Liquidity

Wrapping XRP brings about a significant advantage to its holders by boosting liquidity. For XRP holders, this process provides an opportunity to diversify their portfolio across different blockchain networks, resulting in heightened token utility and increased liquidity. In the Ethereum-developed DeFi ecosystem, for instance, an XRP holder can strategically leverage the abundant options available to ensure liquidity.

Source: Chainlink

How Does Wrapped XRP Work?

Source: Multichain Media

Before wrapping an XRP, there needs to be a custodian who can guarantee that the wrapped XRP will have the same value as its original cryptocurrency. This custodian may take the form of a decentralized autonomous organization (DAO), a smart contract, a code rule, or a multisig wallet. The act of wrapping the cryptocurrency by the custodian is referred to as minting, and the process of returning it to its original form is known as burning. In the case of XRP, the custodian in charge of wrapping and unwrapping is a smart contract.

The process of wrapping an XRP involves a user sending their XRP to a smart contract. This smart contract would in turn give them an equivalent amount of the wrapped tokens. While securely storing the original XRP in a reserve. In order to ensure that wrapped XRP stays equivalent to the XRP token, each wXRP has an actual XRP held in reserves. The wrapped XRP is pegged to the XRP to ensure that users can switch between both assets, similar to how BUSD is pegged to the US dollar.

What determines the value of wrapped XRP is the XRP token. This process is possible through arbitrage. Wrapped XRP is designed to be close in value to regular XRP. If the wrapped XRP price rises, traders create more by wrapping regular XRP and selling it, which would bring down the wXRP price. When the value of wrapped XRP drops, traders buy and unwrap it, selling regular XRP to increase the wXRP’s price. This back-and-forth helps to create a stable value between the relationship of the two tokens.

How to Wrap and Unwrap XRP

Source: CoinTelegraph — An XRP in a wrapped box. A pictorial representation of wrapped XRP (wXRP)

For XRP holders looking to enhance utility across different blockchain networks through wrapping, here is a process you can follow:

• Find a provider of wrapped cryptocurrencies for example Wrapped.com from TokenSoft is a leading provider of wrapped cryptocurrencies and they offer a user-friendly service for wrapping or unwrapping your XRP.
• To get started, create an account with them using their Typeform.
• The conversion details will be provided by Wrapped.com
• If you’re using SushiSwap as your platform, Wrapped.com will offer you seamless integration with the MetaMask wallet.

What are the Use Cases of Wrapped XRP?

Source: CoinTelegraph

There are various use cases for wrapped XRP. However, it is important to note that these use cases evolve alongside the cryptocurrency landscape. Let’s take a look at a few of them:

DeFi Trading

Wrapped XRP can be used in DeFi through margin trading. Experienced crypto traders employ margin trading as a tactic to amplify potential profits. It is done through borrowing extra funds to augment their trading position.

Traders can utilize wXRP for margin trading on decentralized exchanges (DEXs), enabling access to leverage for larger market positions and trades that exceed their capital limitations. This approach allows traders to amplify their profits (and also losses) by leveraging wXRP in their transactions.

Source: Bookmap — Margin trading increases the purchasing power of an experienced trader

DeFi Lending

Wrapped XRP is not limited to trading alone. It can also be used on various DeFi lending platforms. Platforms such as MakerDAO, Aave, and Compound provide users with the opportunity to lend their crypto assets and earn interest, as well as to borrow assets by using their cryptocurrencies as collateral.

On these platforms, wXRP can be supplied for lending, enabling holders to earn interest. And in a case where users are borrowing, they can secure loans in other cryptocurrencies by leveraging their wXRP as collateral. Engaging in this process allows their asset to actively participate in the DeFi ecosystem, accessing liquidity and generating income without the need to sell their native XRP token.

Other Use Cases

wXRP extends beyond just lending and trading. Its versatility is spread across various crypto use cases. It plays a role in yield farming by providing liquidity to diverse DeFi platforms and earning rewards in return.

Another emerging use case is automated market maker pools where wXRP can be used to enhance liquidity by enabling automated and decentralized trading of cryptocurrencies.

Additionally, wrapped cryptocurrencies, such as wXRP can be utilized as loan collateral. Users can be provided with access to capital while retaining ownership of their digital assets.

Overall, the applications of wrapped XRP are poised to evolve in tandem with advancements in cryptocurrencies and blockchain technology. As a token, wXRP serves as a bridge connecting various DeFi and blockchain ecosystems, empowering users to extend the utility of their crypto assets beyond their native environments.

Are Wrapped Tokens Safe?

To answer the question of whether or not wrapped tokens are safe, one ought to consider the contribution they bring to the blockchain ecosystem. With wrapped tokens, the efficiency and functionality of cryptocurrencies have experienced significant improvement. It has enhanced interoperability among blockchain networks, seamless integration across different chains, and collective growth of the DeFi ecosystem.

However, the safety of wrapped tokens heavily relies on the custodian. If the custodian acts maliciously by releasing the original tokens to an unauthorized party, holders of the wrapped tokens may encounter significant losses.

To mitigate such risks, the custodian must be a trusted and reputable entity. In the instance of XRP, Ripple has appointed Hex Trust, a leading digital asset custodian in Asia, as the trusted custodian. Hex Trust diligently works to ensure the safety of XRP tokens in their custody, implementing necessary measures to protect against any potential misconduct.

Source: Wrapped.com

The blockchain community is actively exploring decentralized contract-managed bridges as a potential alternative to custodians. However, it’s important to note that this approach is still in progress and under consideration. It is an ongoing development discussion within the community.

Conclusion

The advent of wrapped cryptocurrency represents an innovative stride in the evolution of blockchain technology. This development has expanded possibilities within the DeFi ecosystem, fostering interoperability across blockchains. Wrapped XRP is a notable component of this innovation, allowing users to engage in diverse applications within the cryptocurrency space.

The process of wrapping and unwrapping XRP has been simplified through user-friendly platforms like Wrapped.com. These platforms collaborate with trusted custodians to ensure the secure handling of wrapped tokens. However, users need to exercise caution in selecting a custodian to avoid the risk of losing their assets.

Notably, the blockchain community has been actively exploring decentralized smart contract-managed bridges as a potential substitute for custodians. This is seen as a promising alternative to enhance the security of wrapped tokens. Wrapping tokens represents a significant advancement in enhancing cross-chain interoperability and utility. As the blockchain ecosystem continues to evolve, we can expect the emergence of additional use cases for wrapped tokens, reshaping the landscape of the DeFi ecosystem and the cryptocurrency industry at large.