A wrapped token is a cryptocurrency that represents another cryptocurrency on a different blockchain, maintaining a 1:1 peg with the original asset. Wrapped Bitcoin (WBTC) is the canonical example: Bitcoin holders deposit BTC with a custodian, who mints an equivalent amount of WBTC on Ethereum.
WBTC holders can use Bitcoin's value in Ethereum's DeFi environment by lending it, providing liquidity, or using it as collateral. When they want their BTC back, they burn WBTC and receive native BTC. Wrapping solves the interoperability problem. Bitcoin and Ethereum are separate blockchains that can't natively interact. Wrapped tokens create synthetic bridges between them.
The mechanism relies on custodians or smart contract bridges to hold the underlying asset and issue the wrapped version. Custodial wrapping, like WBTC, requires trusting the custodian not to steal the deposited Bitcoin. Bridge-based wrapping uses smart contracts to lock native assets on one chain and mint wrapped versions on another.
Bridge security is critical because bridge hacks have resulted in some of the largest crypto losses as attackers exploit vulnerabilities to steal locked assets while leaving wrapped tokens unredeemable.
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Wrapped Token
Representing an asset from one chain on another chain.