A wrapped token is a cryptocurrency whose value is pegged 1:1 to another asset — usually from a different blockchain — by locking the original asset in a smart contract or with a custodian and issuing an equivalent token on the destination chain. Wrapped tokens solve one of blockchain’s fundamental problems: native assets like Bitcoin cannot natively exist on or interact with other blockchains like Ethereum. Wrapping creates a tokenised representation that can participate in DeFi, lending, and trading on chains it wasn’t designed for.
The most prominent example: Wrapped Bitcoin (WBTC) — an ERC-20 token on Ethereum backed 1:1 by real Bitcoin held by a centralised custodian (BitGo). WBTC allows BTC holders to use their Bitcoin in Ethereum DeFi protocols — supplying it as collateral on Aave, trading it on Uniswap, or deploying it in yield strategies — without selling their BTC. Other examples: wETH (Wrapped ETH) — ERC-20 version of ETH needed because ETH itself doesn’t conform to the ERC-20 standard; stSOL — wrapped staked SOL; and cross-chain wrapped assets via bridges. Key risks: wrapped tokens introduce custodial risk (for centralised wrapping) or smart contract risk (for decentralised wrapping) — the wrapping mechanism is a potential failure point, as demonstrated by several bridge hacks where wrapped asset backing was stolen. Decentralised alternatives like tBTC (Bitcoin on Ethereum via threshold cryptography) aim to reduce custodial risk.
Example: A BTC holder wraps 5 BTC into 5 WBTC via BitGo. They deposit WBTC into Aave as collateral and borrow $80,000 USDC at 65% LTV — accessing liquidity without selling their Bitcoin position.
Learn more: WBTC Network — Wrapped Bitcoin
