
A type of wrapped token (see: types of wrapped tokens) that is locked on one network, and a wrapped version of that token is then created and issued automatically on another network (blockchain). Once the issuing process is initiated, synchronization between the locking and issuance on the two networks has to be carried out (usually using synchronized smart contracts or an intermediate network running a certain protocol). On redeeming of the wrapped version, it is usually canceled (burned) and the original underlying token gets released.
Usually, the wrapping process is carried out to tokens which have or provide utility outside their native blockchains. For non-custodial type, and as the name suggests, the wrapped token class does not involve any custodial services provided by third-parties. Minting of non-central wrapped tokens is handled on a decentralized autonomous organization (DAO). DAOs are entities with no central management, that are governed by a community of developers and interested stakeholders operating and organized around a specific set of rules enforced on a blockchain. DAOs function by means of smart contracts, which sets of pre-coded instructions and procedures that automatically execute once a set of criteria are satisfied. These entities are constructed on open-source blockchains, and hence operate in full autonomy and transparency to the market (all parties have access to their code).
As opposed to non-central wrapped tokens (non-custodial wrapped coins), the value of central or custodial wrapped token class is sustained and validated by two parties: a custodian and a merchant. Both parties validate transactions using the proof-of-stake (PoS) consensus mechanism and ensure the token/ coin is securely stored on the network. Central or custodial wrapping involves converting a token/ coin into its wrapped form, first by delivering it to a merchant. The merchant uses the token/ coin as collateral deposited with a custodian that, in turn, provides the desired wrapped coin.
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