Understanding the Difference Between Wrapped Assets, NFTs, and Stablecoins
As the years wind by, the crypto space has expanded to include many different aspects. As a result, the current space features new digital assets such as NFTs, stablecoins, and wrapped assets. However, these terms may not hold any substantial meaning for people new to the crypto world. It is vital that the investors know what kind of assets they put their money into and the risks involved. Therefore, this explainer will outline the various digital assets and their traits.
Wrapped Assets
Wrapped crypto tokens are cryptocurrencies used on the DeFi platforms linked to the value of another original cryptocurrency or other assets like gold, equities, shares, and real estate. These assets are created through a straightforward process. To create wrapped assets, the custodian mints the specified quantity of the original token supplied on a certain platform, like Ethereum.
This process is done in response to requests from merchants like Airswap, AAVE, or CoinList. These assets exist in two forms; redeemable and cash-settled. Tokens under the cash-settled model cannot be exchanged for the underlying asset. On the other hand, Redeemable tokens let investors trade the wrapped token for the underlying asset.
The first wrapped assets were the wrapped Bitcoin tokens utilized in the Ethereum blockchain using smart contracts. These assets were denominated in wBTC and were used to provide investors with guaranteed income from their investments.
These tokens are not only limited to bitcoin, with other assets fitting the bill as long as they adhere to Ethereum ERC-20 and Binance Smart Chain BEP-20. This feature makes them very similar to stablecoins, assets that are thought to hold similar traits.
Wrapped tokens must be treated and handled by a custodian organization that will wrap and unwrap the asset since they are tied to another asset. However, due to the decentralized nature of cryptocurrency, this “wrapping and unwrapping” process may be difficult to carry out.
Wrapped tokens have a variety of uses in the crypto space. The assets create bridges across networks, enable interoperability in the cryptocurrency industry, and enable the usage of non-native assets on any blockchain.
Non Fungible Tokens(NFTs)
Non-fungible tokens (NFTs) are cryptographic assets on a blockchain that can be distinguished from one another by their distinctive identifying codes and information. The NFTs cannot be bought or swapped for equivalent amounts as cryptocurrencies can.
This feature contrasts with fungible tokens, like cryptocurrencies, which are interchangeable and may thus be used as a medium for business transactions. This feature makes NFts an ideal medium for showcasing the ownership rights of a particular item.
The NFTs may exist in various forms so long as they are in digital form. In this case, NFTs can exist in the form of art, music, in-game items, photos, or even videos. NFTs may also represent real-world items such as real estate. Converting these digital items into an NFT is “tokenizing.”
Despite being around since 2014, NFTs have only recently gained traction in the crypto world. These NFTs are just now becoming well-known due to spotlighting by influencers and increased availability due to the recent bubble in 2021.
A startling $41 billion was spent on the NFT market in only 2021, almost as much as was spent on the world’s fine art market. Some popular collections, such as the Bored Ape Yacht Club and CryptoPunks, have sold for over $1 million. These NFTs can be bought from online marketplaces such as OpenSea, SuperRare, and Raible.
Stablecoins
Stablecoins are a form of digital currency that uses stabilization mechanisms to keep its value “stable” against one or more official currencies or other assets. These assets may also include other crypto-assets and financial instruments. The goal of stablecoins is to offer a substitute for extreme volatility for the most widely used cryptocurrencies.
Thus, stablecoins can be used as a mode of exchange in place of other cryptos prone to irregular value fluctuations. Using stablecoins in place of cryptocurrencies such as bitcoin can mitigate many risks for both buyers and sellers.
Stablecoins exist in three forms; Fiat-collateralized stablecoins, crypto-collateralized stablecoins, and algorithmic stablecoins. Fiat-collateralized stablecoins are pegged to legal tenders such as the US dollar. Examples of stablecoins may include Tether (USDT) and USD coin.
Crypto-collateralized stablecoins, on the other hand, are those backed by reserves made of other cryptos. An example of such a stablecoin is DAI. Algorithmic stablecoins can opt in or out of holding reserves. Instead, they rely on a computer program; or algorithm to maintain their stability. Examples of such stablecoins are Ampleforth, Frax, and Empty Set Dollar (ESD).
Stablecoins work by keeping reserve assets on hand as collateral or using supply-controlling computational algorithms; stablecoins aim to ensure stable prices. This is the case with all stablecoins: Fiat-collateralized stablecoins, crypto-collateralized stablecoins, and algorithmic stablecoins.
All three of these stablecoins use supply-and-demand matching measures to maintain a stable value that can then be maintained and used as an alternative to legal tenders. These coins have recently come under scrutiny, with regulators aiming to close off any existing loopholes that may lead to financial collapse.
Bottom Line
The crypto world is a technological marvel that may hold great promise for the future of human society. The development of the crypto space has led to the development of many different assets with diverse applications. NFTs, wrapped assets, and stablecoins are the most profitable creations that stem from crypto development.
Each of these digital assets has shown great promise for holders, earning many investors profits. Despite their great promise, willing investors must assess the nature of each asset before injecting their capital into the asset. By doing this, the investors can minimize risk while capitalizing on the assets that suit their plan.
