Summary

A pegged token is a cryptocurrency token that is tied to the value of another asset. It is called a pegged token because the original asset is placed in a software shell, a type of digital vault that allows the pegged copy to be created on another blockchain.

What interest? Different blockchains provide different functions, and they cannot talk to each other. The Bitcoin blockchain does not know what is happening on the Ethereum blockchain. But in the case of pegged tokens, there can be more bridges between different blockchains.


the introduction

Have you ever been frustrated by not being able to use BTC on Ethereum? Or ETH on Binance Smart Chain? Coins on one blockchain cannot simply be transferred to another.

Pegged tokens are a way to circumvent this limitation and use non-native assets on a blockchain.


What is a staked token?

A pegged token is an encoded copy of another digital currency, which is linked to the value of the asset it represents and can usually be redeemed by that asset (i.e. unpegged from it) at any time, and usually represents an asset that does not exist natively on the blockchain in which it is issued.

You can consider a pegged token similar to a stablecoin in that it derives its value from another asset. In the case of a stablecoin, this other asset is a certified local currency, while in the case of a pegged token, it is usually an asset that exists natively on another blockchain.

Since blockchain chains are disparate systems, there is no appropriate way to transfer information between them. Pegged tokens increase interoperability between different blockchains – the underlying tokens can run across chains.

It is worth noting that if you are a regular user, you do not have to worry about the process of linking, unlinking or wrapping, you can trade the linked tokens like any other digital currency. For example, this is the WBTC/BTC market on Binance.


How do pegged tokens work?

Let's take the example of tied bitcoin (WBTC), which is a tokenized version of bitcoin on the Ethereum network. WBTC is an ERC-20 token that is supposedly pegged to the value of Bitcoin at a 1-to-1 ratio, allowing you to efficiently use BTC on the Ethereum network.

Pegged tokens typically require a custodian – an entity that holds an amount of the asset equivalent to the staked quantity. The custodian could be a merchant, a multisig wallet, a decentralized autonomous organization, or even a smart contract. In the case of the WBTC token, the custodian has to hold 1 BTC for every 1 WBTC token mined. There is proof of this reserve on-chain.

How does the linking process work? A merchant sends a custodian BTC to mine. The custodian then mines WBTC tokens on the Ethereum network depending on the amount of BTC sent. When a merchant needs to exchange WBTC for BTC, they submit a burn request to the custodian, and the BTC is then released from the reserve. You can consider the custodian to be the one who links and unlinks. In the case of WBTC tokens, a decentralized autonomous organization adds and removes custodians.

Although some members of the cryptocurrency community may refer to Tether (USDT) as a pegged token, it is not exactly that. While USDT trades against the dollar typically at a 1-to-1 ratio, Tether does not hold the exact amount of actual dollars for each USDT in circulation in its reserves. Rather, this reserve consists of money, real cash equivalents, assets, and loan receivables. But the idea is very similar. Each USDT token acts as a pegged copy of the USD token.


Tokens staked on the Ethereum network

Tokens pegged on the Ethereum network are tokens from other blockchains, made in compliance with the ERC-20 standard. This means that you can use assets that are not native to the Ethereum network on this network. As you might expect, pegging and unpegging tokens on the Ethereum network incurs a processing fee.

The methods for implementing these tokens can vary greatly, and we wrote about them in more detail in our article about Bitcoin.

An interesting example of pegged tokens on the Ethereum network is the Ethereum pegged token (WETH). Quick summary: Ethereum (ETH) must be used to pay for transactions on the Ethereum network, and ERC-20 is a technical standard for issuing tokens on the Ethereum network. Both the BAT token and OmiseGo (OMG), for example, are tokens. ERC-20 features.

But since ETH was developed before the ERC-20 standard, it does not comply with it, which poses a problem: many decentralized applications require you to convert between Ethereum and an ERC-20 token. That's why the Ethereum Wedge Token (WETH), an ERC-20-compliant pegged version of Ethereum, was created. It's basically a tokenized version of Ethereum on the Ethereum network!


Tokens staked on the Binance Smart Chain

You can peg Bitcoin and many other cryptocurrencies for use on the Binance Smart Chain, much like tokens pegged on the Ethereum network.


The Binance Bridge allows you to link your digital assets (such as BTC, ETH, XRP, USDT, BCH, DOT and more) for use on the Binance Smart Chain as BEP-20 tokens. Once you bring your assets onto the Binance Smart Chain, you can trade them or use them in various applications to collect returns.

Linking and unlinking tokens has a processing fee, but for Binance Smart Chain, expect much lower processing fees than other blockchains. You can read more about Binance Bridge in our detailed article.


Advantages of using pegged tokens

Although many blockchains have their own standards for tokens (such as ERC-20 for Ethereum or BEP-20 for Binance SmartChain), these standards cannot be used across multiple chains. Pegged tokens allow non-native tokens to be used on a blockchain.

Additionally, staked tokens may increase liquidity and capital efficiency for centralized and decentralized trading platforms as well. The ability to link passive assets and use them on another chain may bring greater connectivity to liquidity that would otherwise be isolated.

Finally, one of the great advantages is the transaction time and fees. Although Bitcoin has amazing properties, it is not the fastest, and its use can sometimes be expensive. Although this is okay, it can sometimes cause some trouble. These issues can be mitigated by using a blockchain with faster transaction times and lower fees.


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Restrictions on the use of pegged tokens

Most current implementation methods for staked tokens require trust in the custodian holding the funds. In terms of currently available technology, pegged tokens cannot be used for cross-chain transactions – they usually have to go through a custodian.

However, some less centralized options are in the works and may be available in the future to mine and redeem pegged tokens with complete trustless transparency.

Mining can be relatively expensive due to high processing fees and may lead to some slippage.


Concluding thoughts

Pegged tokens help create more bridges between different blockchains. A pegged token is a tokenized image of an asset that exists natively on another blockchain.

This helps with operational interoperability in the cryptocurrency and decentralized finance (DeFi) ecosystem; Pegged tokens open the door to a world where capital becomes more efficient and applications are able to share liquidity with each other.