eli5 - Wrapped tokens - crypto

Submitted by More_Ad_6196 t3_10jgq7h in explainlikeimfive

I am pretty sure I understand that a wrapped token is a way to use let’s say an Ethereum on Bitcoin’s chain, but I’m confused about what happens to the original ETH token. Can it be used to chase yields or stake while the WETH exists?

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Azeranth t1_j5ka8pi wrote

A wrapped token is essentially "removed" from circulation while its wrapped. It can not be used in a transaction on the ETH network whike its out of network.

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desferecat t1_j5kaj6l wrote

>What happens to the original ETH token?

When a wrapped token is created, the original cryptocurrency that is being represented is locked up in a smart contract on the new blockchain. This smart contract ensures that for every wrapped token that is created, the underlying cryptocurrency is held in reserve. When someone wants to convert their wrapped token back into the original cryptocurrency, the smart contract will release the corresponding amount of the original cryptocurrency to them. The original token is not destroyed or affected in any way during this process.

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More_Ad_6196 OP t1_j5katxh wrote

Thank you, so there is no loophole that people are using to use the ETH while the WETH is in circulation?

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desferecat t1_j5kf5pr wrote

There's no loophole, you can use your ETH while also using WETH. When you're converiting ETH into WETH, you are essentially creating a new token that is tied to the value of ETH. So you can still use your original ETH while also using WETH. You can convert your ETH to WETH and back as needed. The original ETH will be locked up in the smart contract until you decide to convert.

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Owlstorm t1_j5kngrt wrote

There are a few loopholes.

51% is an obvious one- send bitcoin to get WBTC and then reverse the transaction on the bitcoin chain. Sell the WBTC to double your "money". It's one of the big defi piñatas.

Not happening with bitcoin any time soon (we'd need several more halvings), but you can see it with smaller tokens.

Also the usual boring hacking stuff like input validation and social engineering.

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More_Ad_6196 OP t1_j5ks37k wrote

So to put it in ELI5 terms, someone can take a Bitcoin, wrap it, sell the WBTC on Ethereums chain and reverse the transaction to get back their BTC while profiting off of the WBTC sale?

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Owlstorm t1_j5ksie0 wrote

Yes

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More_Ad_6196 OP t1_j5ksnfj wrote

Woah

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lemoinem t1_j5lr8bz wrote

Not specific to wrapped coins though. Any transaction that has part of it on the blockchain and part off the blockchain is vulnerable, by design.

Prep (send) the ON part, transact (receive) the OFF part, Revert (take back) the ON part.

You now have both the money associated to both the ON and OFF part.

That's essentially doing a transaction with a credit card and doing a charge back once you recieved the goods. Nothing new here...

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