A wrapped token is a tokenized representation of a cryptocurrency that exists on a different blockchain than its original network. The wrapped version is pegged 1:1 to the underlying asset, meaning one wrapped token always equals one unit of the original coin. This allows assets to move across blockchain ecosystems that would otherwise be incompatible.
The most well-known example is Wrapped Bitcoin (WBTC), an ERC-20 token on Ethereum that represents Bitcoin. To create WBTC, a user deposits BTC with a custodian, who then mints an equivalent amount of WBTC on Ethereum. When the user wants their BTC back, the WBTC is burned and the original Bitcoin is released.
Wrapped tokens solve a critical problem: cross-chain interoperability. Without them, Bitcoin holders could not participate in Ethereum-based DeFi protocols like lending, borrowing, or providing liquidity. Wrapped tokens unlock this functionality by bridging different blockchain ecosystems.
Common wrapped tokens include:
- WBTC — Bitcoin on Ethereum
- WETH — a wrapped version of ETH that conforms to the ERC-20 standard
- renBTC — a decentralized wrapped Bitcoin alternative
The main risk of wrapped tokens is custodial trust. If the entity holding the original asset is compromised, the wrapped tokens could lose their peg. Decentralized wrapping solutions aim to reduce this risk by replacing a single custodian with smart contracts and distributed validators.
Wrapped tokens play a key role in DeFi and cross-chain strategies, especially when used alongside sidechains and rollups to maximize capital efficiency.