A wrapped token is a cryptocurrency token whose value is pegged 1:1 to another cryptocurrency, but which exists on a different blockchain. Wrapping allows assets to be used on blockchains where they don't natively exist.
How Wrapping Works
The original asset is deposited with a custodian or locked in a smart contract. An equivalent amount of the wrapped token is then minted on the target blockchain. To unwrap, the process is reversed — wrapped tokens are burned and original assets are released.
Examples
WBTC (Wrapped Bitcoin): Bitcoin represented as an ERC-20 token on Ethereum, enabling BTC to be used in Ethereum DeFi.
WETH (Wrapped Ether): ETH wrapped to conform to the ERC-20 standard for compatibility with DeFi protocols.
wSOL: Wrapped Solana for use on other blockchains.
Why Wrapped Tokens Matter
They enable cross-chain liquidity. Without wrapped tokens, Bitcoin holders couldn't participate in Ethereum DeFi. Wrapped tokens are a practical solution to blockchain interoperability until more native cross-chain solutions mature.
Risks
Wrapped tokens introduce custodial or smart contract risk. If the custodian is compromised or the bridge is hacked, the backing could be lost, de-pegging the wrapped token.