Wrapped XRP (wXRP) is a crypto asset pegged to XRP (XRP) and can be used on blockchains other than Ripple’s native XRP Ledger. Ripple is a blockchain-
Wrapped XRP (wXRP) is a crypto asset pegged to XRP (XRP) and can be used on blockchains other than Ripple’s native XRP Ledger. Ripple is a blockchain-based global payments system providing crypto solutions for businesses, and XRP is the native currency of the Ripple network. Identical in value, its wrapped version, wXRP, can be used in financial payments and settlements on other blockchains.
This article will discuss why we need wXRP, how to buy wXRP, use cases of wXRP, and the purpose and safety of wXRP tokens.
What are wrapped cryptocurrencies?
Wrapped cryptocurrencies are tokens that are used as cryptocurrencies on blockchains other than the original blockchain they were built on. The value of wrapped crypto is the same as its original cryptocurrency (1:1). This allows cryptocurrencies like Bitcoin (BTC), Ether (ETH) or XRP to be used on chains other than their native blockchains, thereby increasing their utility.
The purpose of wrapped cryptocurrencies is to help solve the problem of decentralized finance (DeFi) cross-chain liquidity. If each cryptocurrency stays in its own ecosystem, growth is contingent on demand in that ecosystem alone. It would essentially be operating in a closed system.
Wrapped crypto solves this by providing blockchain interoperability among different cryptocurrencies and blockchains. This opens avenues for improving cross-chain liquidity for DeFi ecosystems and boosts crypto asset utility.
Related: Wrapped crypto tokens, explained
What is wrapped XRP (wXRP)?
XRP is a cryptocurrency that runs on the native XRP Ledger and facilitates transactions on the Ripple Network. One can purchase XRP for financing transactions, investing or exchanging crypto on Ripple. For a transaction involving the use of XRP on any other blockchain than Ripple, Wrapped XRP will be used.
Wrapping XRP increases the scope and utility of XRP to be used on multiple blockchains other than its native XRP Ledger. For instance, wXRP on the Ethereum blockchain would enable its users to turn XRP into a yield-bearing asset by trading, staking, pooling or utilizing Ethereum wallets, decentralized applications (DApps), games and more to diversify their portfolio.
Is wrapped XRP (wXRP) the same as XRP?
Wrapped XRP is a 1:1 equivalent of XRP. Its value is pegged to XRP due to arbitrage, similar to a stablecoin like USD Coin (USDC) or Binance USD (BUSD) being pegged to the United States dollar. WXRP is fully collateralized and held with a custodian that makes sure that each wXRP is backed by an equivalent XRP reserve. Both wrapping and unwrapping follow a 1:1 ratio. There is no other cost apart from transaction fees on the blockchain.
When users wrap their XRP, they simply send their cryptocurrency to a smart contract that provides them with the wrapped tokens. The XRP is stored and then returned when someone else unwraps their wrapped token. One can choose to unwrap their wrapped XRP token at any time. This gives users freedom and the ability to freely convert between wXRP and XRP as per their requirements and the blockchain they are on.
How does wrapped XRP (wXRP) work?
Wrapping XRP allows XRP to be used on blockchains other than XRP Ledger. But how exactly does this work? In the case of wrapped cryptocurrencies, there needs to be a custodian that guarantees the same value of the original crypto as its wrapped version.
The custodian could be anybody, a decentralized autonomous organization (DAO), a smart contract, multisig wallets or simply a code rule. The custodian wraps the crypto, called minting, and returns back to the original version, called burning. For XRP, the smart contract serves as the custodian.
When a user wraps XRP, the smart contract provides them with the wrapped version for use on other blockchains, while the original XRP gets stored with a custodian. It returns to circulation when someone unwraps their wXRP. The original form is then sent back to its original blockchain, XRP Ledger. Therefore, each wXRP is backed by a single XRP in reserve, which helps to maintain its peg.
The price value is pegged because of trading arbitrage. If wXRP falls below XRP’s price, traders will see an opportunity for arbitrage profit and purchase the cheaper wXRP to unwrap and sell it for a profit. This increased wXRP demand would reduce supply and raise the price, helping reach the peg. Similarly, if the price of wXRP rises above XRP, trading pressure to sell wXRP will increase in turn, increasing the supply and leading to price reduction until it reaches the 1:1 value peg.
Why do we need Wrapped XRP (wXRP)?
Wrapping XRP has many benefits for XRP holders. Some of these include:
Interoperability
Wrapping XRP enhances blockchain interoperability for XRP holders. It enables XRP holders to take advantage of trading benefits across different chains. It also provides an opportunity for accessing services of various DApps or DeFi protocols, allowing for better use cases and more returns.
Liquidity
A significant benefit that…
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