Crypto glossary
Wrapped token
A wrapped token is a token on one blockchain that represents an asset from another chain or standard, backed 1:1 by the original held in reserve.
Bitcoin cannot run on Ethereum directly, so wrapped versions such as WBTC and cbBTC hold real BTC with a custodian and issue an equal amount of ERC-20 tokens on Ethereum and other networks. When a holder redeems, the wrapped tokens are burned and the BTC is released.
Wrapping also happens within a single chain. WETH is ETH converted into an ERC-20 token so that it works with smart contracts built for that standard; wrapping and unwrapping take place in a simple contract at a fixed 1:1 rate.
The key risk is the backing. A wrapped token is only as reliable as the custodian, bridge or contract holding the reserves. If the custodian fails or the bridge is hacked, the wrapped token can lose its peg, as happened to assets bridged through Multichain after its collapse in 2023.
Example
A holder converts 1 BTC into 1 WBTC on Ethereum and supplies it as collateral on Aave to borrow stablecoins, without selling the bitcoin exposure.
Related terms
Latest articles on Wrapped token
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