Technological evolution is a merciless course of, and historical past is affected by discarded improvements.
Simply as landlines gave method to cellphones and e mail changed fax machines, it appears to be solely a matter of time earlier than wrapped tokens find yourself in a metaphorical blockchain expertise museum.
They have been solely ever actually meant as a band-aid resolution to cross-chain interoperability, but we’ve needed to settle for their existence as half and parcel of interacting with the DeFi world for much too lengthy. Web chatter within the DeFi summer season talked of an excellent future the place composability actually prolonged throughout chains, although this isn’t what has occurred.
In my opinion, if we have been to maintain on counting on wrapped tokens, we threat undermining fairly than advancing the mass adoption of DeFi.
When wrapped tokens started
Earlier than we resign wrapped tokens to historical past, let’s check out the position they’ve performed.
Wrapped tokens have been unarguably useful within the early days of DeFi, offering holders of those belongings entry to borrowing, lending and buying and selling alternatives in a model new ecosystem of instruments launched at first solely on Ethereum.
However utilizing wrapped tokens introduces a stage of counterparty threat that basically shouldn’t be there in a really decentralized monetary system.
Each time a wrapped token is minted, it means inserting long-term belief in a third-party custodian or protocol that isn’t associated to the underlying blockchain. If ever these companies fail, not solely do particular person customers lose out, however this might doubtlessly have devastating penalties for complete ecosystems.
We additionally should belief any issuer’s means to take care of the peg between the unique asset and its wrapped token illustration. As now we have seen with the likes of TerraUSD, issues can unravel extremely shortly, which provides an extra layer of pointless threat. The successive implosion of FTX couldn’t have been a extra dramatic reminder of the existential dangers at play.
Asides from systematic issues, wrapped tokens have additionally confirmed to have important safety challenges. By counting on bridges to maneuver belongings throughout blockchains, we’re exposing customers’ funds to pointless ranges of threat. We solely want to take a look at the Ronin bridge exploit to recollect the dimensions of loss that may happen in bridge hacks.
Now we have to maneuver away from wrapped tokens to cease the erosion of customers’ belief, which in the end units DeFi adoption again.
Placing belief on the desk
Even when the assumptions of belief wanted for wrapped tokens don’t appear to hassle most on a regular basis customers, I’d argue that the extra belief layer provides rise to a aspect impact that’s even worse.
As every illustration of any given asset is issued on an alternate chain, every of those belongings are non-interchangeable. For example, WBTC and TBTC can’t be deployed collectively as BTC liquidity in a single pool. As a substitute, having each simply causes fragmentation, hurting one another’s possibilities at reaching adequate ranges of liquidity to be aggressive.
Each wrapped token for every asset is extra liquidity and customers being diluted throughout that chain’s markets. Now we have too many stablecoins, bridges and wrapping companies. Opposite to guarantees of saving customers cash, this fragmentation truly makes all the things much less environment friendly and dearer for customers, thus undermining true composability.
However slowly, we’re seeing this wrapped token development reverse. USDC and USDT are each natively issued on dozens of chains now, which has dramatically improved USD denominated markets throughout all of those ecosystems. As this continues, we’ll see the recognition and utility of wrapped USD tokens fade away perpetually.
Within the ever-evolving panorama of blockchain expertise, the obsolescence of wrapped tokens seems inevitable. Whereas they served a helpful objective within the early days of bridging ecosystems and instigating curiosity and progress of DeFi, their days at the moment are numbered.
Any deal with wrapped tokens has diverted consideration and assets precisely on the time when it might have been extra expedient to deal with growing extra user-friendly and native cross-chain approaches. To create a extra inclusive, safe and sturdy monetary system for all, we should look towards decentralization — like making decentralized cross-chain swapping options the core of our DeFi ecosystem.
It’s clear to me that the continued use of wrapped tokens has immediately contributed to a delay in unlocking DeFi entry for the lots. The trade must shift towards true decentralization, upending the DeFi ecosystem for the higher and making wrapped tokens out of date.
Simon Harman is the Berlin-based founder and CEO of Chainflip, a cross-chain decentralized trade set to launch in mid-2023. He’s additionally a board member of the Oxen Basis. Previous to Chainflip, Simon led groups that produced merchandise together with Session, a messaging app primarily based on the Sign protocol. Simon has been a cryptocurrency fanatic since 2014.
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