Wrapped Token
A wrapped token is a token that represents another asset one-to-one in a different format, often on a different blockchain. Wrapped bitcoin (WBTC) on Ethereum and wrapped ether (WETH) are common examples.
Why wrapping exists
Smart contracts usually expect tokens to follow a specific standard. Bitcoin cannot run on Ethereum, so to use BTC in Ethereum apps it has to be represented by an ERC-20 token. Wrapping does exactly that: the original asset is held somewhere, and a matching token is issued where it is needed.
Wrapping does not always mean another chain. WETH lives on Ethereum itself: ETH predates the ERC-20 standard, so it is wrapped into an ERC-20 version that many DeFi contracts can handle more easily. In that case a smart contract holds the ETH and returns it on request.
How it works
To wrap, you deposit the original asset with a custodian, a bridge or a contract, and receive the wrapped token. To unwrap, you return the wrapped token, it is burned, and the original is released. The wrapped token should always be backed by an equal amount of the original.
An example
Say you want to use 1 BTC as collateral in an Ethereum lending app. You go through a wrapping service, which holds your 1 BTC and mints 1 WBTC to your Ethereum address. You can now deposit the WBTC. Later you send 1 WBTC back, it is burned, and 1 BTC is released to you.
Who you are trusting
A wrapped token is only as good as its backing. With custodial wrappers like WBTC, you rely on the custodians actually holding the coins and honouring redemptions. With bridge-based wrappers, a bridge hack can leave the wrapped tokens unbacked, and they can lose their peg. Contract-based wrappers like WETH avoid a custodian but still carry smart-contract risk.
Different wrapped versions of the same asset can coexist and are not interchangeable, so check the exact token contract.
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Frequently asked questions
Is WBTC the same as Bitcoin?
No. It is an Ethereum token meant to be redeemable for BTC at one-to-one. Its value depends on the custodians and the redemption process working.
Why do I need WETH if I already have ETH?
Some DeFi contracts only accept ERC-20 tokens. WETH is ETH in that format; many apps wrap and unwrap it automatically for you.
Can a wrapped token lose its peg?
Yes. If the backing is lost, frozen or doubted, the wrapped token can trade below the original asset.
Related terms
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