Wrapped Token

A wrapped token is a cryptocurrency token pegged to the value of another asset and usable on a different blockchain. The original asset is "wrapped" by locking it in a smart contract or custodian, while an equivalent token is minted on the target chain.

How Wrapping Works:

1. User deposits the original asset (e.g., BTC) with a custodian or into a smart contract
2. An equivalent amount of wrapped tokens (e.g., WBTC) is minted on the target chain (e.g., Ethereum)
3. The wrapped token trades 1:1 with the original asset
4. To unwrap, the process reverses: wrapped tokens are burned, and original assets are released

Popular Wrapped Tokens:

WETH Special Case: Wrapped Ether (WETH) is unique because it wraps ETH to make it ERC-20 compatible. Native ETH predates the ERC-20 standard, so many DeFi contracts require WETH for uniform token interaction.

Why Wrapped Tokens Exist: - Cross-Chain Access: Use Bitcoin's value in Ethereum DeFi - DeFi Composability: Standardized token interfaces work across protocols - Liquidity Bridging: Move value between ecosystems without selling

Risks: - Custodial Risk: Centralized custodians (like BitGo for WBTC) introduce counterparty risk - Smart Contract Risk: Wrapping contracts can be exploited - Peg Deviation: Wrapped tokens can temporarily trade above or below parity - Bridge Attacks: Cross-chain bridges are frequent exploit targets (Wormhole: $320M, Ronin: $625M)

Decentralized alternatives like tBTC (Threshold Network) aim to reduce custodial risk by using distributed signing schemes instead of centralized custodians.