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Wrapped Assets in DeFi: Expanding Access to Traditional Investments

August 21, 2023

Decentralized finance (DeFi) has opened up exciting new opportunities for investors by providing financial services without traditional institutions. One key innovation is wrapped assets - tokenized versions of real-world assets that work in DeFi protocols. Let's look at how wrapped assets are expanding access to traditional investments.

What Are Wrapped Assets?
Wrapped assets are basically tokenized representations of traditional assets like stocks, bonds, commodities, and fiat money. They are created by putting the asset into a digital "wrapper" that makes it compatible with DeFi platforms and blockchains.
For example, Wrapped Bitcoin (WBTC) is an ERC-20 token backed 1:1 by real Bitcoin. This means 1 WBTC token = 1 BTC. The wrapping process allows traditional assets to become more fluid, tradeable, and integrated with DeFi apps while still maintaining their core value.
The tokenization enables traditional assets to tap into the advantages of blockchain technology like decentralized trading, transparency, programmability through smart contracts, and more. This bridges traditional and decentralized finance in an exciting way!

Some popular wrapped assets include:

  • Wrapped Bitcoin (WBTC)
  • Wrapped Ether (WETH)
  • Wrapped Filecoin (wFIL)
  • Wrapped Uniswap (wUNI)
  • Wrapped Yearn Finance (wYFI)
  • Wrapped BNB (wBNB)
  • Wrapped Link (wLINK)
  • Wrapped Staked Ether (wstETH)

Key Benefits of Wrapped Assets
There are several key benefits that wrapped assets unlock for investors looking to access traditional assets through DeFi:

  1. Access to More Assets and Liquidity
    Wrapped assets let you bring a ton more assets to the table in DeFi. Without wrapping, DeFi apps could only use native crypto tokens like ETH for fees etc.
    But wrapping opens the door for assets like BTC, stocks, real estate, commodities, etc. to plug into DeFi seamlessly. This massively grows the liquidity pool as traditional assets can now join the party. More assets = more liquidity = happier DeFi users!
  2. Asset Interoperability
    Wrapped assets allow assets to hop across blockchains and still retain their value. For example, wrapping BTC creates a version that works smoothly with Ethereum smart contracts. So you can tap into Ethereum's liquidity and technology while keeping your BTC value.
    This interoperability means more options for trading, lending, and investing across traditional and crypto assets. Without wrapping, moving assets between blockchains would require centralized exchanges.
  3. Isolated Volatility Exposure
    Holding wrapped tokens means you only get exposure to that asset's volatility, not the whole platform's token. For example, with WBTC on a DeFi platform, your returns only fluctuate with BTC, not with ETH.
    This helps investors isolate and control their volatility exposure compared to holding the native governance token.
  4. Improved Capital Efficiency
    Using real-world assets as collateral through wrapping can make your capital work harder. These assets maintain their value as collateral while freeing up capital for additional trades and arbitrage.
    Instead of liquidating positions or scrounging up capital, traders can use their existing assets in wrapped form. This gives you more mileage out of your working capital.
  5. Decentralized Structure
    Because they are issued on blockchains, wrapped assets avoid centralized middlemen through smart contracts. This provides the usual benefits of decentralization - transparency, security, reduced counterparty risk, and non-custodial structures.

Use Cases of Wrapped Assets
Wrapped assets enable a range of new use cases as traditional assets integrate into DeFi protocols:

  • Use as collateral - Wrapped versions of BTC, stocks, bonds, commodities can provide collateral to borrow stablecoins or other assets in lending protocols like MakerDAO.
  • Liquidity mining - Adding wrapped assets to liquidity pools earns LP tokens which users can stake to earn governance tokens or yield.
  • Token trading - Allows direct decentralized trading between traditional assets like fiat currencies, stocks, and commodities. For example, wrapped Tesla stock could be swapped for wrapped Apple stock trustlessly on a DEX.
  • Investing through yield farming - Users can use wrapped assets to participate in yield farming opportunities across DeFi protocols to earn governance tokens and trading fees.
  • Exposure to real-world assets - Wrapping traditional assets gives a decentralized exposure to their value and volatility, without needing to own or custody the asset directly.
  • Leveraged trading - Borrowing stablecoins against wrapped asset collateral which is then used to trade and leverage positions.
  • Automated strategies - Smart contracts can be built to execute automated yield farming, liquidity providing, trading, and arbitrage strategies between wrapped assets across DeFi protocols.
  • Payment mechanisms - Wrapped fiat currencies like wUSD provide decentralized and blockchain-compatible versions of traditional currencies that can be transacted and traded.

Risks Associated With Wrapped Assets
While wrapped assets provide attractive benefits, they also come with certain risks that should be considered:

  • Counterparty risk - Wrapped assets rely on a custodian to hold the underlying asset. If this custodian is hacked or mismanages assets, it could compromise the wrapped token.
  • Smart contract risk - Bugs or exploits in the smart contract governing a wrapped token could lead to loss of pegs and liquidity.
  • Regulatory uncertainty - The legal treatment of wrapped assets is still ambiguous under most jurisdictions. Future unfavorable regulations could impact wrapped token usability.
  • Liquidity risk - Low liquidity for certain wrapped assets could make it difficult to unwrap or exit positions. This may require using a centralized exchange which harms decentralization.
  • Price manipulation - Illiquid-wrapped assets with few token holders could be vulnerable to price manipulation through pumping and dumping.
  • Technology risk - Wrapped versions rely on maintaining compatibility with the underlying blockchain's technology and protocol changes.

Wrapped assets are one of the most essential crypto innovations that serve as a bridge between decentralized finance and traditional finance. They allow a much wider range of real-world assets to seamlessly plug into DeFi protocols, generating more liquidity, trading opportunities, and financial flexibility.
While wrapped assets solve many problems in terms of asset accessibility and composability, they also introduce risks related to smart contract security, regulation, and liquidity constraints. Understanding these tradeoffs is key for investors looking to take advantage of wrapped assets in DeFi.

Are you seeking to pioneer a cutting-edge DeFi application that seamlessly incorporates DeFi protocols and leverages crypto-based technology? Look no further. As a leading DeFi development company, RWaltz offers unparalleled expertise and a proven track record in transforming innovative concepts into functional DeFi solutions.
Empower your project with the potential of wrapped assets and amplify your application's capabilities in the dynamic world of decentralized finance. Our seasoned team of experts stands ready to guide you through the intricacies of wrapped assets integration, ensuring your application's relevance and competitive edge.
Harness the power of the blockchain revolution, unlock the potential of wrapped assets, and redefine the landscape of financial technology. Take the first step today by connecting with RWaltz for a complimentary consultation. Together, let's sculpt the future of finance.
To schedule the meeting with our experts and to embark on your journey as a trailblazer in the realm of DeFi innovation, fill out the contact form.

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