What is a wrapped token?
Key points
- A wrapped token is a ‘copy’ of a cryptoasset issued on another blockchain and collateralised by the original coin.
- It is backed 1:1 by the underlying, mirrors its price and broadens its use—e.g., trading on decentralised exchanges that do not support the original asset.
- The best-known example is Wrapped Bitcoin (WBTC) on Ethereum, widely used across decentralised finance (DeFi).
Why wrapped tokens exist
As decentralised applications, notably in DeFi, have grown, so has the need to move liquid cryptoassets from one network to another.
That is what wrapped tokens are for. Using WBTC, a user brings the value of BTC into the Ethereum or Tron ecosystem. WBTC can be posted as collateral to borrow stablecoins or used in yield farming—all without resorting to centralised exchanges and services.
WBTC also simplifies operations for exchanges, wallets and services by removing the need to run separate nodes.
How WBTC emerged
WBTC is the result of the Wrapped Tokens project, founded by three organisations: BitGo, Kyber Network and Ren. It was first announced in October 2018 and officially launched on January 31, 2019.
The WBTC ecosystem includes dozens of certified merchants, among them Compound, Maker, Blockfolio, Uniswap, CoinGecko, Aave and 0x. They handle the minting and burning of WBTC.
How wrapped tokens are created and work
A wrapped token is issued by moving the cryptoasset into a dedicated vault and then minting the wrapped token via a smart contract.
For WBTC, a user transfers BTC to a specified address on the Bitcoin network; WBTC is then minted and sent to the desired address on Ethereum.
A specialised service safeguards the underlying in a smart contract and mints the wrapped version. Redemption works in reverse: WBTC is burned on Ethereum and the collateral is unlocked on the Bitcoin network.
Where cross-chain bridges come in
Cross-chain bridges are sets of automated smart contracts that lock assets in one network and issue a wrapped token in another.
Their main task is to make isolated networks and applications interoperable. For example, to farm with BTC on Ethereum, a user must somehow move BTC to an ETH address—that is what bridges do.
For WBTC, a full list of trusted bridges is available on the Wrapped BTC website.
What bridges and wrapped tokens exist
Beyond WBTC there are many wrapped versions of other coins—their issuance is limited only by the technical capabilities of a given network and its applications. A few examples:
Wrapped Ethereum (WETH)
The wrapped version of ETH. Because most DeFi applications on Ethereum use the ERC-20 standard and ETH predates it, WETH was created to ease swapping with ether.
WETH can be issued on dozens of blockchains, including Polygon, Binance Smart Chain, Solana, Near, Avalanche and Fantom. It is one of the most common tokens in DeFi and yield farming. WETH is also used, for example, for trading on the NFT platform OpenSea.
Wrapped tokens on BNB Chain
Developers of Binance’s blockchain created Binance Bridge to issue wrapped versions of popular cryptoassets on their network. Users can wrap BTC, ETH, XRP, USDT, BCH, DOT and other coins to access BNB Chain and the applications built on it.
Wrapped tokens on Solana
One of the most popular bridges for Solana is Wormhole, which connects the network with Ethereum, Avalanche, Oasis, Binance Smart Chain and Polygon. The roster of tokens and networks is constantly expanding.
Wrapped tokens on Avalanche
Alongside numerous app-specific bridges, the developers launched the official Avalanche Bridge from Ethereum to Avalanche, enabling the wrapping of popular stablecoins (USDC, USDT, BUSD) and other assets under the ERC-20 standard.
Wrapped tokens on Near
The team behind this blockchain introduced Rainbow Bridge to bring liquidity from Ethereum to Near. It supports wrapping many of DeFi’s most popular tokens: stablecoins (USDT, DAI, TUSD), WBTC and WETH, DEX tokens (1INCH, UNI), lending-protocol tokens (AAVE, COMP) and exchange tokens (HT, CRO).
Risks of using wrapped tokens
Wrapped tokens offer a convenient way to interact with applications across multiple networks. But there are risks worth noting.
First, cross-chain bridges, like any smart contracts, can contain vulnerabilities. This was shown by the Wormhole hack on Solana in February 2022. By exploiting a bug, attackers drained about 120,000 WETH ($320m at the time).
Second, there is centralisation risk. Private keys that control funds held by a bridge can be compromised. The underlying assets may be withdrawn to an external address, leaving users unable to redeem their collateral. This happened to Axie Infinity’s Ronin bridge in late March 2022; hackers siphoned cryptoassets worth roughly $625m.
Further reading
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