Wrapped Token

A wrapped token is a version of one cryptocurrency that has been repackaged to work on a different blockchain. Because different blockchains speak different technical languages and cannot directly communicate with each other, wrapped tokens act as translators or stand-ins. When you “wrap” a token, you lock up the original asset somewhere and receive a new token on the destination blockchain that represents it one-to-one and can be redeemed for the original later.

The most well-known example is Wrapped Bitcoin (WBTC), which allows Bitcoin — which lives on its own blockchain — to be used on the Ethereum network. You cannot simply send Bitcoin into an Ethereum smart contract because they are entirely separate systems. But if you deposit real Bitcoin with a custodian and receive WBTC in return, you now hold a token on Ethereum that is always worth one Bitcoin and can be redeemed for the real thing at any time. This opens up the entire Ethereum ecosystem of DeFi apps, lending platforms, and exchanges to Bitcoin holders.

Wrapped tokens essentially expand the usefulness of assets across the crypto ecosystem. They come with trade-offs, though: most wrapped tokens rely on a custodian (a company or a smart contract) to hold the underlying asset, which introduces trust or smart contract risk. Newer bridging technologies are working to make this process more trustless and decentralized.

Example: Imagine you are traveling from the US to Japan and you exchange your US dollars for Japanese yen at a currency exchange desk. While you are in Japan, the yen represents the value of the dollars you handed over and you can use it locally. When you come home, you exchange the yen back. A wrapped token works similarly — you trade your original asset for a stand-in version that works in the new environment, with the understanding that you can always get the original back.