What are Wrapped Tokens?

Wrapped cryptocurrencies are digital tokens that act as “bridges” between blockchains, allowing a cryptocurrency native to one blockchain to function on another. Bitcoin, for example, can’t natively interact with Ethereum’s smart contracts, but Wrapped Bitcoin (WBTC) lets it “travel” to Ethereum as an ERC-20 token.

This is done by locking the original asset (BTC, for example) in a secure reserve managed by a custodian or a decentralized protocol and minting an equivalent wrapped version (WBTC, in this case) on the target blockchain. The two are pegged 1:1, guaranteeing 1 WBTC always equals 1 BTC in value.

In this article, we’ll explore the mechanics, risks, and role that wrapped currencies have in decentralized finance. 

What is Wrapped Crypto?

Blockchains often operate like isolated islands, each with rules and assets. Wrapped cryptocurrencies bridge these divides, letting you use a token from one chain on another. This simple yet powerful idea solves a critical problem: blockchains’ inability to share assets natively.  

Interoperability is important because it transforms broken ecosystems into connected networks. Without it, Bitcoin remains stuck on its chain, without the possibility of joining Ethereum’s DeFi apps. Wrapped tokens fix this, increasing liquidity and flexibility. For example, WBTC lets Bitcoin holders earn interest on Ethereum-based platforms, while Wrapped Ether (WETH) adapts Ethereum’s native token for apps requiring ERC-20 compatibility. These tokens act as universal translators, supporting cross-chain collaboration.  

Examples include WBTC (Bitcoin on Ethereum), WETH (Ether wrapped into an ERC-20 token for DeFi compatibility), and Wrapped SOL (Solana’s SOL token on Ethereum). These tokens retain the value and functionality of the original asset while unlocking new use cases.  

The process involves three steps:  

1. Locking: The original asset, such as BTC, is deposited into a custodial wallet or smart contract.  
2. Minting: A wrapped token, WBTC, in this case, is created on the target blockchain.  
3. Redeeming: To reclaim the original asset, the wrapped token is burned, and the locked crypto is released.  

Custodians like BitGo manage WBTC reserves, while decentralized alternatives, like renBTC, use smart contracts to automate locking and minting, reducing reliance on centralized entities. However, both models share the goal of making isolated blockchains interoperable.  

Are Wrapped Tokens the Same as Stablecoins?

No. Unlike stablecoins, which peg to fiat currencies like the U.S. dollar, wrapped tokens are tied to other cryptocurrencies. Stablecoins aim for price stability, while wrapped tokens focus on interoperability. For example, Tether (USDT) mirrors the dollar’s value, but WBTC mirrors Bitcoin’s. Both rely on reserves, but their purposes diverge: stablecoins reduce volatility, while wrapped tokens enable cross-chain utility.  

What is Wrapped Crypto Used For?  

Wrapped tokens were created to solve a critical problem: blockchains operating in isolation. Before its invention, Bitcoin couldn’t participate in Ethereum’s decentralized finance (DeFi) ecosystem, limiting its utility. The first relevant breakthrough came in 2019 with WBTC, which allowed Bitcoin holders to lend, borrow, or trade their BTC on Ethereum-based platforms like Aave and Uniswap. This marked a turning point, proving that cross-chain interoperability was possible.  

Today, wrapped crypto’s primary uses include:  

How Wrapped Tokens Work  

Wrapping begins by locking your original cryptocurrency in a secure reserve. For example, to create Wrapped Bitcoin (WBTC), you send BTC to a custodian like BitGo or a decentralized protocol like Ren. These entities hold your Bitcoin in cold storage (offline wallets) or multi-signature smart contracts, safeguarding the asset.  

Once locked, the system mints an equivalent wrapped token on the target blockchain. If you lock 1 BTC, you’ll receive 1 WBTC on Ethereum. This token adheres to the destination chain’s standards. WBTC uses Ethereum’s ERC-20 format, making it compatible with DeFi apps like Uniswap. The minting process varies: custodians manually verify deposits, while decentralized systems like RenVM automate it using nodes that cryptographically prove reserves.  

This 1:1 peg is very important. Auditors like Chainlink track reserves publicly, guaranteeing transparency. Wrapped tokens risk becoming worthless without proper backing.  

Role of Custodians and Smart Contracts  

Custodians are the gatekeepers. They verify your identity through KYC checks and manually mint or burn tokens. This adds security but introduces delays and trust risks. If BitGo is hacked, WBTC holders could lose funds.  

Decentralized systems replace custodians with smart contracts. Take renBTC: you send BTC to a RenVM smart contract, which uses a network of nodes (“Darknodes”) to validate deposits. These nodes generate cryptographic proofs, guaranteeing BTC is locked without third-party oversight. The contract then auto-mints renBTC on Ethereum.  

Smart contracts eliminate human error but carry code risks. A bug in the contract could let attackers drain reserves. However, they enable 24/7 automation and transparency. Anyone can audit Ethereum’s blockchain to confirm renBTC’s reserves.  

Unwrapping Process

Unwrapping reverses the process. Send WBTC back to the custodian or smart contract to reclaim your Bitcoin. The custodian burns the WBTC, reducing its supply, then releases your BTC from their vault. This makes sure that the 1:1 peg remains intact.  

Decentralized systems work faster. With renBTC, burning renBTC triggers an automated release of BTC within minutes. Custodians, however, might take hours for manual checks. Delays can frustrate users, especially during market volatility.  

Once unwrapped, the original asset returns to your wallet. If the system fails here – say, a custodian refuses to release BTC – the wrapped token collapses. This happened in 2023 when FTX’s wrapped tokens became stranded after its bankruptcy.  

Use Cases of Wrapped Crypto  

From bridging isolated networks to supercharging DeFi strategies, wrapped tokens solve a number of real-world blockchain challenges.

Enhancing Interoperability  

Blockchains are like countries with their own currencies and rules. Wrapped tokens act as passports, letting assets travel freely. Cross-chain transactions become easy. Imagine swapping Solana’s SOL for Ethereum’s ETH without a centralized exchange. Wrapped tokens like Wrapped SOL (SOLLUM) on Ethereum make this possible by representing SOL as an ERC-20 token. Traders bypass slow, costly intermediaries, executing swaps directly on decentralized exchanges.  

Even NFTs benefit. A Bored Ape Yacht Club NFT on Ethereum can be wrapped into a Solana-compatible token, letting you sell it on Magic Eden. This interoperability broadens audiences and liquidity, turning niche collectibles into cross-chain assets. Projects like Portal Bridge automate this, wrapping NFTs into a universal format usable on any chain.  

Participating in DeFi  

Let’s say you hold Bitcoin but want to earn interest on it. Wrap it into WBTC, deposit it into Compound, and start earning yields. All while keeping exposure to Bitcoin’s price. No need to sell; your BTC works harder on Ethereum.  

They’re also collateral kingpins. On MakerDAO, you can lock WBTC to mint DAI stablecoins. If you need a loan, you can use Wrapped Ether (WETH) as collateral on Aave, borrow USDC, and pay later. This flexibility lets you leverage assets without selling, a game-changer for long-term holders.  

Liquidity mining thrives on wrapped tokens. Deposit WBTC and ETH into a Curve Finance pool and earn fees from traders swapping between the two. Yield farmers often mix chains: pair Avalanche’s Wrapped AVAX with Polygon’s USDT, maximizing returns across ecosystems.  

But DeFi isn’t risk-free. Always verify audits and reserve transparency. Custodian-backed tokens add counterparty risk, meaning if BitGo fails, WBTC could depeg. Decentralized options remove intermediaries but depend on code reliability.  

Popular Wrapped Tokens  

Below, we dive into key examples, unpacking how they work, their risks, and why they’re reshaping finance.  

Wrapped Bitcoin (WBTC)  

WBTC is Bitcoin’s Ethereum avatar. Managed by a consortium (BitGo as custodian, merchants like Kyber Network), it locks BTC in audited reserves and mints ERC-20 WBTC. Every WBTC is 1:1 backed and verified by public audits.

Wrapped Bitcoin Price Chart

(WBTC)

$106,564.00

24h change + 0.68%

Wrapped Bitcoin (WBTC)

$106,564.00 (+0.7%)

---

24h Range

$105,366.00 ― $109,383.00

Market Cap: $13,719,921,325

Trading Volume: $572,840,977

All Time High: $109,383.00 (-2.6%)

If you want to lend BTC on Aave, you can convert it to WBTC, deposit, and earn interest. Over $10B in WBTC circulates, making it the go-to bridge for Bitcoin into DeFi. But trust matters: BitGo holds your BTC, and if they’re hacked, WBTC could implode. Decentralized alternatives like renBTC use smart contracts instead, but adoption lags.  

Wrapped Ether (WETH)  

Ethereum’s native ETH isn’t ERC-20 compliant, meaning it can’t natively trade on DEXs like Uniswap. WETH solves this. When you swap ETH on Uniswap, the platform auto-converts it to WETH, wrapping it into an ERC-20 format.

Wrapped Ether (Mantle Bridge) Price Chart

(WETH)

$2,489.80

24h change + 1.06%

Wrapped Ether (Mantle Bridge) (WETH)

$2,489.80 (+1.1%)

---

24h Range

$2,452.69 ― $2,606.98

Market Cap: $187,900,021

Trading Volume: $6,625,067

All Time High: $4,597.42 (-46.2%)

This lets ETH function like any token: stake it in Curve pools, use it as collateral on MakerDAO, or trade it for SHIBA INU.

Wrapped BNB (WBNB)  

BNB, in its native form, is not a BEP-20 token—it runs on its own standard. Many decentralized applications (dApps) and DeFi protocols on BSC require BEP-20 compatibility.

Wrapped BNB Price Chart

(WBNB)

$663.46

24h change + 3.06%

Wrapped BNB (WBNB)

$663.46 (+3.1%)

---

24h Range

$643.78 ― $671.26

Market Cap: $886,535,022

Trading Volume: $3,119,572,288

All Time High: $789.32 (-15.9%)

Wrapping BNB into wBNB makes it usable in smart contracts, similar to how wETH is used on Ethereum. wBNB can be traded on decentralized exchanges like PancakeSwap, where most tokens follow the BEP-20 standard.

Wrapped Versions of Real-World Assets

Tokenized real-world assets (RWAs) are blockchain-based digital tokens that represent ownership of tangible or traditional financial assets, such as real estate, gold, or stocks, allowing fractional ownership, easy trading on decentralized platforms, and integration with DeFi ecosystems while maintaining a direct link to off-chain reserves.

For example, PAX Gold (PAXG) pegs 1 token to 1 oz of LBMA-certified gold stored in Brinks vaults. You can use PAXG as collateral on MakerDAO to borrow DAI, essentially taking a loan against gold without selling it. Real estate platforms like RealT tokenize properties, letting you buy fractions of a Detroit apartment for $50.  

But RWAs face some challenges. How do you prove a tokenized skyscraper isn’t a scam? Oracles like Chainlink verify off-chain data (such as property deeds and gold reserves), but regulators are wary. Still, RWAs could democratize access; imagine trading tokenized Tesla shares 24/7 or borrowing against your vinyl collection.

Benefits of Wrapped Crypto  

Liquidity Enhancement  

Wrapped tokens flood markets with fresh liquidity. Take Wrapped Bitcoin (WBTC): by turning BTC into an Ethereum-compatible token, it lets Bitcoin holders trade, lend, or stake on Ethereum DEXs. More WBTC in pools means tighter spreads and better prices for everyone.  

This liquidity isn’t confined to one chain. Solana’s Wrapped SOL on Ethereum or Avalanche’s Wrapped AVAX on Polygon create interconnected markets. Traders swap assets across chains effortlessly, while liquidity providers earn fees from a broader user base. More liquidity means smoother trades and fewer slippage headaches.  

Access to Diverse Ecosystems  

Wrapped tokens are your all-access pass to blockchain features. Hold Bitcoin but want to use Ethereum’s DeFi apps? There is no need to sell your BTC. Instead, you can repurpose it.  

They also incentivize innovation. Developers build cross-chain apps, knowing assets can move freely. Imagine a game on Solana that uses wrapped Ethereum NFTs or a Polygon DEX offering Bitcoin-backed loans. Wrapped tokens turn isolated tools into a unified toolkit, letting you mix and match blockchain perks.  

Improved Capital Efficiency

Why let assets gather dust on one chain? Wrapped tokens let you deploy them everywhere. Use Bitcoin as collateral on MakerDAO without converting it to ETH. Earn yield on Litecoin by wrapping it into WLTC and staking on Compound. Your assets multitask, maximizing returns.  

This cuts costs, too. Moving Bitcoin natively costs time and high fees. Wrapping it into WBTC lets you transact on Ethereum’s faster, cheaper network. Save money, skip delays, and keep your original asset’s exposure.  

Risks of Wrapped Crypto  

Custodial Risks  

When you wrap crypto, you trust someone else to hold the original asset. Think of it like storing gold in a bank vault. If the bank gets robbed or goes bankrupt, your gold could vanish.

Most wrapped tokens, such as companies or DAOs, rely on centralized custodians to keep the underlying assets safe. Suppose they’re hacked, like the $120 million BadgerDAO breach, or mismanage funds; your wrapped tokens might lose their 1:1 peg, turning into nothing. Even semi-decentralized models often depend on small groups of validators, creating a “too big to fail” risk. 

Always ask: How transparent is the custodian about reserves? Do they have insurance? If the answer is vague, tread carefully.  

Smart Contract Vulnerabilities  

Wrapped tokens work strictly by their code. Smart contracts automate wrapping and unwrapping, but a single coding error can drain millions. For example, the Poly Network hack exploited a flaw in cross-chain logic, losing $600 million. Even audited contracts aren’t foolproof. In 2022, Nomad Bridge lost $190 million due to a minor code oversight. 

Compliance Issues  

Wrapping crypto can land you in regulatory gray zones. Let’s say you turn Bitcoin into wrapped Bitcoin (WBTC) on Ethereum. In the U.S., regulators might view this as creating a security or derivative, triggering SEC oversight.

In the European Union, MiCA regulations could classify wrapped tokens as e-money and require licenses. Unwrapping during a regulatory crackdown might freeze your funds or force you to prove ownership. Tax-wise, wrapping and unwrapping could count as a taxable event in some countries, turning a simple transaction into a paperwork nightmare.  

The main takeaway is that compliance isn’t just the custodian’s job. Using them could mean fines or legal action if you’re in a jurisdiction that bans wrapped assets, such as China. Always ask: Does my country treat wrapped tokens as securities, commodities, or something else? When in doubt, consult a professional.  

What Will Wrapped Crypto Look Like in the Future?

The future of wrapped crypto will likely step away from relying on intermediaries. This shift toward trustless wrapping would cut out the risk of human error or greed. At the same time, new blockchain tech will determine how these tokens work. Layer 2 solutions could slash fees and speed up transactions, making wrapped assets as easy to use as sending a text.  

Soon, you might see assets other than crypto tokens tokenized and wrapped for DeFi. From stocks to rare art, there are many viable contenders for wrapping. The catch is that regulators want to know who holds these assets. Compliance could turn into heavy paperwork, especially as adoption grows into sectors like gaming or supply chains.

Scalability will test this vision since more users mean more strain on networks. Developers will need to balance growth with security, guaranteeing the security of decentralized systems. 

Conclusion

Wrapped tokens play a crucial role in enhancing blockchain interoperability, unlocking liquidity, and expanding the utility of crypto assets across multiple ecosystems. By enabling non-native tokens to function on different blockchains, they serve as vital bridges in DeFi.

While they introduce new opportunities, users should also be mindful of the risks, especially those tied to smart contracts and custodial mechanisms. As the crypto space continues to evolve, wrapped tokens will likely remain central to cross-chain innovation and DeFi growth.

Wrapped Crypto Tokens FAQs