CoinucationWrapped Token
A wrapped token is a token on one blockchain that represents an asset from another, backed one-to-one by the original held in custody.
A wrapped token lets an asset be used on a blockchain it was not created for. Wrapped Bitcoin, or WBTC, is an ERC-20 token on Ethereum backed by real bitcoin held by custodians. Each WBTC can be redeemed for one BTC. This allows bitcoin holders to use DeFi applications on Ethereum, such as lending or providing liquidity, which the Bitcoin network itself cannot do.
Wrapping also happens within a single chain. Wrapped Ether, or WETH, exists because ETH predates the ERC-20 standard and does not follow it. Many contracts only accept ERC-20 tokens, so users wrap ETH into WETH at a one-to-one rate. In this case the wrapping is done by a simple smart contract with no custodian.
The risk of a wrapped token is the entity holding the original asset. If a custodian is hacked or refuses redemptions, the wrapped version can lose its peg. In 2024 the WBTC custody arrangement changed to include a partner linked to Justin Sun, which led some DeFi protocols to reconsider accepting it as collateral. Understanding who backs a wrapped token is essential.
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