What Is Wrapped Token?
Also known as: Wrapped Asset, Wrapped Crypto
In short
A wrapped token is a representative token created so an asset can be used on another blockchain or under a different token standard, intended to be backed 1:1 by the original asset. WBTC and WETH are common examples.
Wrapping usually takes place by locking the original asset and minting the same amount of wrapped token in return; to unwrap, the token is burned and the locked asset is released. For example, Wrapped Bitcoin (WBTC) is an ERC-20 token minted on Ethereum against BTC held by custodian institutions. This way, Bitcoin holders can use their assets as collateral or liquidity in DeFi protocols on Ethereum.
Wrapped tokens can operate with different trust models. In structures that run entirely through smart contracts, such as WETH, the risk is limited to the code. In custodian-based models such as WBTC, the user has to trust that the locked assets are actually held and will be repaid. For wrapped tokens created through bridge protocols, security depends on the bridge's verification mechanism.
Some of the largest attacks in crypto history have targeted bridges. When a bridge is compromised, the backing of wrapped tokens circulating on another network can disappear, and their value falls quickly. The existence of multiple wrapped versions of the same asset coming from different bridges also fragments liquidity and causes confusion for users.
Last updated: · This content is for information purposes only and is not investment advice.