Wrapping Trust for Interoperability: A Preliminary Study of Wrapped Tokens

Blockchains are traditionally blind to the real world. This implies reliance on third parties called oracles when extrinsic data are needed for smart contracts. Oracle implementation, however, is still controversial and debated due to the reintroduction of trust and a single point of failure. The blindness to the real world also makes blockchains unable to communicate with each other, preventing any form of interoperability. This limitation prevents, for example, liquidity held in Bitcoin from flowing into DeFi applications. An early approach to the interoperability issue is constituted by wrapped tokens, representing blockchain native tokens issued on a non-native blockchain. Similar to how oracles reintroduce trust and a single point of failure, the issuance of wrapped tokens involves third parties whose characteristics need to be considered when evaluating the advantages of crossing-chains. This paper provides an overview of the available wrapped tokens and the main issuing procedures. Benefits, limitations, and implications for trust are listed and discussed.

Automated summary

Blockchains are blind to the real world and rely on third-party oracles for external data. The implementation of oracles is controversial and brings back issues of trust and single points of failure. Blockchains also lack interoperability, preventing the flow of liquidity between different chains. Wrapped tokens are one solution to achieve interoperability, but their issuance involves considerations of trust and third-party involvement.