What is a wrapped token?
In short
A wrapped token is a representation of a cryptocurrency in a format compatible with other apps or networks, designed to track the original coin 1:1. Well-known examples are WBTC and WETH.
How do you use bitcoin in an Ethereum app when the two networks don’t speak the same language? One solution is a wrapped token, a “wrapped” version of the original coin. Think of it as a storage receipt: you leave an item in a warehouse and get a receipt that represents it. The item stays there, but the receipt can be used elsewhere.
Usually, the original cryptocurrency is locked in a smart contract or held by a custodian. A matching amount of wrapped tokens is then issued. In the reverse process, the tokens are burned and the original coin is released, according to the rules and limits of each system.
WBTC represents BTC and is used, among other places, on Ethereum as an ERC-20 token. The bitcoin backing it is held in custody, while minting and redemption go through authorized participants. In other words, you aren’t actually sending BTC into the Ethereum network.
Why it matters
Wrapped tokens let you use an asset in apps where its original form isn’t supported. That way it can be used on decentralized exchanges or as collateral in decentralized finance (DeFi) lending services.
Wrapping doesn’t require switching networks. WETH is a typical example: you deposit ETH into the corresponding contract and receive the same amount of WETH, which is ERC-20 compatible. This helps apps that handle tokens under common rules. ETH remains Ethereum’s native coin and is used for network fees.
What to watch out for
The intended 1:1 peg doesn’t guarantee that the market price will always be the same. A problem with the reserves, the custodian, the contract or the bridge, where one is used, can make redemption difficult and affect the price.
We always separate two questions: who holds the original coin, and how do you get it back? Also check the network and the contract address. The same ticker or a similar name doesn’t prove that two tokens have the same backing or the same risks.