Why Transfer Tokens From Ethereum to Tezos? Explained in 5 Minutes With Wrap Protocol

Why Transfer Tokens From Ethereum to Tezos? Explained in 5 Minutes With Wrap Protocol

There are many ecosystems that have wrapped assets, i.e. tokens transferred thereupon from another blockchain. Thus, Bitcoin exists on its native blockchain as well as on Tezos as tzBTC. But why do users transfer tokens between blockchains anyway?

Let’s find it out from the example of Wrap Protocol and tzBTC.

Why Is Transfer of Tokens Between Blockchains Called Wrapping?

Let’s say, Bob wants to create an analogue of DOGE on Tezos, tDOGE. He takes the original code in Solidity, translates it to LIGO, and publishes it. This won’t make Tezos wallets work with tDOGE as the structure and functions of ERC-20 are very different from FA1.2 and FA2. But even if it had worked, its price would have been different from that of the original DOGE as those would have been two different tokens each having its own liquidity, trust, and popularity level.

To properly transfer tokens between blockchains with the retention of their prices, developers came up with wrapping. The idea behind it resembles the principles of stablecoins: the issuer issues tokens on blockchain A collateralised with the same amount of tokens on blockchain B. Thus, when wrapping DOGE in ERC-20, Bob gets the tDOGE of FA2 standard that has the value of the original token.

How Tokens Are Transferred Between Blockchains

Back in 2020, Bitcoin Association Switzerland launched tzBTC, a Bitcoin-backed token. Users send BTC to the organization, and it sends them the same amount of tzBTC on the Tezos blockchain. The exchange of tzBTC for BTC happens the same way. Other developers implemented the token transfer via smart contracts. Thus, Wrap Protocol created special contracts on Ethereum and Tezos that enable users to transfer the twenty most popular ERC-20 tokens as well as ETH itself on Tezos.

For those interested in details, we recommend Wrap Protocol’s white paper. In a simplified form, though, it looks as follows:

  1. Alice opens the Wrap app and connects her Tezos and Ethereum wallets.
  2. She chooses an ERC-20 token she wishes to wrap in FA2, e.g. USDT.
  3. Wrap Protocol prepares the transaction to send USDT from Alice’s ETH wallet to the Deposit Contract.
  4. Alice confirms the transaction and USDT goes to the deposit contract.
  5. The quorum contract gets the deposit’s confirmation and calls the wToken contract on the Tezos blockchain.
  6. wToken releases wUSDT and sends them to Alice’s Tezos wallet.

Unwrapping of wUSDT happens in reverse order: wToken burns wUSDT and notifies the Ethereum deposit contract which then returns USDT to Alice.

Why Users Wrap Tokens

The main reason is financial gain. Nascent DeFi ecosystems, such as Tezos, offer better conditions for passive income compared to the old gang like Bitcoin and Ethereum.

Thus, depositing DAI in lending services on Ethereum brings the investor a 4.4% APR. Meanwhile, staking LP tokens of a wDAI paired with tez on Wrap Protocol can bring a 63% APR.

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