Wrapped Token
Definition
A tokenized representation of a cryptocurrency from one blockchain that can be used on another blockchain, maintaining a 1:1 peg with the original asset through locked reserves.
Wrapped tokens allow assets to be used across different blockchains. Wrapped Bitcoin (WBTC) is an ERC-20 token on Ethereum that represents real Bitcoin held in custody. Each WBTC is backed 1:1 by BTC locked in a custodial reserve, allowing Bitcoin holders to participate in Ethereum's DeFi ecosystem.
The wrapping process typically works like this: you send BTC to a custodian, they lock it and mint an equivalent amount of WBTC on Ethereum. To unwrap, you burn the WBTC and receive your BTC back. The 1:1 peg is maintained by the reserve backing — every WBTC in circulation has a corresponding BTC in custody.
Wrapped tokens solve a fundamental blockchain problem: different blockchains can't natively communicate. Bitcoin can't interact with Ethereum smart contracts, and ETH can't be used on Solana. Wrapped tokens bridge this gap, though they introduce trust assumptions about the custodian or bridge mechanism.
Trust models vary significantly. WBTC uses a centralized custodian (BitGo), requiring trust in a single entity. RenBTC used a decentralized network of nodes. Trustless wrapped assets (like liquid staking tokens) use smart contracts to eliminate custodial risk. The more decentralized the wrapping mechanism, the lower the counterparty risk but often the higher the technical complexity.
For portfolio tracking, wrapped tokens are equivalent in value to their underlying asset but exist as separate tokens on different blockchains. Tracking both the wrapped version and the original requires multi-chain support and understanding that WBTC on Ethereum and BTC on Bitcoin represent the same underlying value.
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Related Terms
Frequently Asked Questions
Is wrapped Bitcoin the same as Bitcoin?
WBTC is designed to maintain a 1:1 peg with BTC, so the value is equivalent. However, they're different assets on different blockchains. WBTC carries additional counterparty risk (trust in the custodian) that native BTC doesn't have. For DeFi use cases on Ethereum, WBTC provides necessary interoperability.
What are the risks of wrapped tokens?
The primary risk is custodial — if the entity holding the underlying asset fails or is compromised, the wrapped tokens could lose their peg. Bridge hacks have resulted in billions in losses. Smart contract risk also exists for the wrapping/unwrapping mechanism. Use only well-established wrapped tokens with transparent reserves.