Wrapped Token
A token representing another cryptocurrency from a different blockchain, enabling cross-chain use in DeFi.
What is Wrapped Token?
A wrapped token is a tokenized version of a cryptocurrency or asset that has been 'wrapped' — locked in a custodial smart contract or with a custodian — so that an equivalent token can be issued on a different blockchain network. Wrapping enables assets to move across incompatible blockchains and participate in DeFi protocols. The most prominent example is Wrapped Bitcoin (WBTC), an ERC-20 token on Ethereum pegged 1:1 to Bitcoin. To create WBTC, a user deposits BTC with a custodian (currently BitGo); an equivalent amount of WBTC is minted on Ethereum. WBTC can then be used in Ethereum DeFi — as collateral in Aave, in Uniswap liquidity pools, etc. — without the user selling their BTC. Wrapped tokens introduce counterparty risk: the token's value depends on the custodian actually holding the underlying asset. Decentralized bridges attempt to replicate wrapping without a centralized custodian but introduce different smart contract risks.
Example
A Bitcoin holder wants to earn yield on their BTC in DeFi. They deposit 1 BTC with a WBTC custodian and receive 1 WBTC on Ethereum. They deposit WBTC into Aave as collateral, borrow USDC against it, and deploy the USDC in a yield strategy. Their BTC remains backed 1:1 — they can redeem WBTC for BTC at any time through the custodian.
Source: WBTC.network — Wrapped Bitcoin