DeFi needs to go beyond Wrapped Tokens

DeFi must expand beyond Wrapped Tokens.

If we continue to rely on Wrapped Tokens, we may weaken rather than advance the mass adoption of DeFi.

By Simon Harman

Translated by Deep Chain TechFlow

Technological evolution is a cruel process, and history is full of innovations that have been abandoned. Just as landlines gave way to mobile phones and email replaced fax machines, it seems that Wrapped Tokens will eventually become exhibits in the blockchain technology museum.

They are actually just a temporary solution for cross-chain interoperability, but we have had to accept them as a necessary part of interacting with the DeFi world for too long. In the summer of DeFi, people talked about a bright future in which composability truly expanded to all chains, but it did not actually happen.

In my view, if we continue to rely on Wrapped Tokens, we may weaken rather than advance the mass adoption of DeFi.

Before we consign Wrapped Tokens to history, let’s take a look at the role they play.

It is undeniable that Wrapped Tokens have played a great role in the early stages of DeFi, providing opportunities for holders of these assets to borrow and trade on Ethereum.

But the use of Wrapped Tokens introduces a counterparty risk that should not exist in a truly decentralized financial system. Every issuance of Wrapped Tokens means a long-term trust in third-party custodians or protocols that are unrelated to underlying blockchains. If these services have problems, not only individual users will suffer, but the entire ecosystem may suffer catastrophic consequences.

In addition, we must also trust the issuer’s ability to maintain the peg between underlying assets and their Wrapped Token representations. As we have seen in projects such as TerraUSD, they can collapse quickly, adding further unnecessary risks. The collapse of FTX is a reminder that existing risks can threaten their survival.

In addition to systemic concerns, Wrapped Tokens have also proven to have significant security challenges. By relying on cross-chain bridges to move assets between blockchains, we expose users’ funds to unnecessary levels of risk. We need only look at the Ronin cross-chain bridge vulnerability to envision the huge losses that cross-chain bridge hacks could cause.

To prevent the erosion of user trust, we must rid ourselves of Wrapped Tokens. Even though the trust assumptions required by Wrapped Tokens may not seem to bother most day-to-day users, I believe the additional layer of trust produces worse side effects.

Because every representation of a given asset is issued on another chain, these assets are not interchangeable. For example, WBTC and TBTC cannot be deployed together as BTC liquidity in a single pool. Instead, owning both only causes fragmentation, damaging each other’s chances of achieving sufficient liquidity to remain competitive.

Each Wrapped Token for each asset means more liquidity and dilution of users in the market on that chain. We have too many stablecoins, cross-chain bridges, and wrapping services. In contrast to the promise of saving users money, this fragmentation actually makes everything less efficient and more expensive, undermining true composability.

But slowly, we are beginning to see this trend of Wrapped Tokens reversing. USDC and USDT are now natively issued on dozens of chains, greatly improving markets priced in dollars across all these ecosystems. As this trend continues, we will see the popularity and utility of wrapping dollars disappear forever.

In the constantly evolving world of blockchain technology, the obsolescence of Wrapped Tokens seems inevitable. While they played a useful role in the early stages of cross-chain ecosystems and the interest and growth that sparked DeFi, their days are numbered.

Any attention and resources focused on Wrapped Tokens have shifted to how to more quickly achieve cross-chain methods that are more user-friendly and native. In order to create a more inclusive, secure, and powerful financial system for everyone, we must move towards decentralization – for example, making decentralized cross-chain exchange solutions the core of our DeFi ecosystem.

For me, continued use of Wrapped Tokens directly leads to delays in mass open DeFi access. The industry needs to turn towards true decentralization, improving the DeFi ecosystem and making Wrapped Tokens obsolete.