Difference Between Wrapped Assets, NFTs, and Stablecoins
If you live outside the cryptocurrency and blockchain realm, it can be hard to understand the latest terminologies hitting the headlines and news feeds. However, what’s likely to be more surprising and eye-catching at the same time is the dollar amount mentioned alongside the terminologies. Like, how can a virtual creation of an artwork file sell for close to $70 million?! Well, that’s the amount the highest bidder was willing to pay for an NFT on Christie’s auction a few months ago.
NFT is an acronym for Non-Fungible Token, blockchain technology’s latest iteration. Blockchain technology came to life over a decade ago now when Satoshi Nakamoto introduced the first blockchain-based project, Bitcoin. It’s a data storage system that takes the form of a distributed ledger. Blockchain has been highly dynamic in an attempt to beat its limitations and at the same time unlock more use cases. NFTs are the latest innovation, but wrapped assets and stablecoins are also remarkable blockchain iterations preceding NFTs.
Read on for more insights and the differences in these blockchain-based innovations.
A wrapped asset refers to a tokenized version of an existing crypto coin. The original coin usually backs the asset, and a holder can redeem it for the coin at any time. So, are wrapped assets cryptocurrency-backed stablecoins? And why did the developers have to create wrapped assets even with the original coin already? Let me take you back a little.
Blockchain technology provides the infrastructure for all these digital assets. However, each one of them is different and meant to serve a distinct purpose. So, for you to understand why a wrapped asset is not a cryptocurrency-backed stablecoin, it’s good to know why the idea of wrapped assets came to be.
Cryptocurrencies exist on blockchains which are usually distinct systems. For instance, Bitcoin runs on the Bitcoin blockchain, and Ethereum exists on the Ethereum blockchain. Therefore, it was impossible for cross-chain information sharing. Furthermore, Bitcoin could not exist on the Ethereum blockchain, and Ethereum could not run on the Bitcoin blockchain. Thus, the cross-chain interoperability was lacking, prompting blockchain experts to introduce wrapped assets as interoperability solutions.
If we can take wrapped Bitcoin (WBTC) as an example, it’s usually an ERC-20 version of the crypto coin that makes it possible for Bitcoin to exist on the Ethereum blockchain. It is pegged to Bitcoin at a 1:1 ratio. A custodian holds a BTC for every WBTC running on the Ethereum blockchain. A Bitcoin holder can acquire WBTC by simply sending BTC to a custodian who then mints an equivalent amount of WBTC and sends it to the merchant. WBTC is redeemable for BTC at any time, so a WBTC holder has BTC by proxy.
Non-Fungible Tokens (NFTs)
NFTs are a special kind of digital asset created on the Ethereum blockchain. Unlike stablecoins and wrapped assets, they are not created to solve blockchain’s underlying limitations but introduce new blockchain use cases. The tokens are non-fungible, meaning each token has unique characteristics and cannot be exchanged for an equivalent. For example, you could swap a WBTC for another and Tether for Tether and remain with the same value. However, this is not possible for an NFT.
In essence, NFTs are digital representations of ‘things,’ including real-world assets. You could have an NFT for a real estate property, a piece of artwork, a sports card, or other collectibles. Jack Dorsey even made an NFT of the first Tweet and sold it for $2.9 million.
The majority of NFTs fall under the Ethereum ERC-721 standard, making it possible for tokens on the same smart contract to have different values. ETH holders can create an NFT if they have enough ETH for the computations involved in minting NFTs and are connected to a marketplace.
Stablecoins are essentially cryptocurrencies designed to address the volatility problems by pegging them to other assets. The assets can be a fiat currency, a real-world asset like precious metals, or other cryptocurrencies.
The coins are usually collateralized at a 1:1 ratio. If there are 1 million stablecoins in circulation, there needs to be at least $1 in reserve. For precious metals like gold, each token is backed by an ounce of gold or barrel of oil, where petro is used as the asset backing. However, the asset-backing is usually higher for cryptocurrencies to accommodate for price volatility. A new class of stablecoins has also emerged, where smart contracts are used to control the price of a coin, eliminating the need for reserve backing.
Wrapped assets, NFTs, and stablecoins are all innovations tailored to a blockchain. Their differences can be traced to aspects such as the incentive for their creation. Stablecoins came to be a solution to crypto volatility, while wrapped assets seek to solve cross-chain interoperability issues. NFTs are a little unique in that they aim to provide more use cases to blockchain enthusiasts. However, they differ from wrapped assets like WBTC, which adhere to the Ethereum ERC-20 standards since most NFTs are ERC-721 tokens. Additionally, NFTs are not cryptocurrencies and cannot be traded on exchanges like stablecoins and wrapped assets.