Definition
A wrapped token is a crypto token that mirrors the value of another cryptocurrency while existing on a different blockchain. It is typically backed at a 1:1 ratio by the original asset, which is held in reserve by a custodian or smart contract. This structure allows the wrapped version to be used in ecosystems and applications where the original asset is not natively supported. Wrapped tokens are common in decentralized finance, where they help connect otherwise separate blockchain environments.
Examples include WBTC, which represents bitcoin on other networks, and WETH, which represents a tokenized form of ether that follows a common token standard. These wrapped versions make it easier for applications to treat different assets in a consistent way, especially in DeFi protocols. Wrapped tokens are closely related to the idea of a bridged asset, where value moves between chains while the original remains locked. They support interoperability by letting value flow across networks without moving the underlying coins themselves.
Context and Usage
Wrapped tokens play a key role in defi by allowing assets from one blockchain to participate in financial activities on another. When a token is wrapped, the original asset is locked, and a corresponding wrapped version is created on the destination chain. This wrapped version can then interact with smart contracts, liquidity pools, and other defi tools that require a specific token format. The design keeps the economic exposure tied to the original asset while making it technically compatible with a new environment.
Wrapped tokens often rely on a bridge or similar mechanism to coordinate locking the original asset and issuing the wrapped representation. In this setup, the wrapped token behaves like a bridged asset, tracking the value of the underlying coin or token. By enabling assets to move in this way, wrapped tokens enhance interoperability between otherwise separate blockchain networks. Users and applications treat the wrapped token as a stand-in for the original, with the expectation that it can be redeemed back into the underlying asset according to the rules of the wrapping system.