Wrapping trust for interoperability. A study of wrapped tokens

TL;DR

This paper examines wrapped tokens as a solution for blockchain interoperability, analyzing their technologies, benefits, and limitations, while highlighting the trust issues introduced by third-party involvement.

Contribution

It provides a comprehensive overview of wrapped tokens, detailing their technological implementations, advantages, and inherent limitations in blockchain interoperability.

Findings

Wrapped tokens enable cross-chain asset transfer.

Third-party reliance introduces trust and failure risks.

Wrapped tokens have specific advantages and limitations.

Abstract

As known, blockchains are traditionally blind to the real world. This implies the reliance on third parties called oracles when extrinsic data is needed for smart contracts. However, reintroducing trust and single point of failure, oracles implementation is still controversial and debated. The blindness to the real world makes blockchains also unable to communicate with each other preventing any form of interoperability. 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 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 wrapped tokens and the main technologies implemented in their issuance. Advantages, as well as limitations, are also listed and discussed.