What Are Wrapped Tokens and How Do They Work?

Unlocking Interoperability in the Crypto Ecosystem

In the world of blockchain, not all networks can communicate directly.

That’s where wrapped tokens come in — they act as a bridge between otherwise isolated blockchains.

Whether you're trading, investing, or using DeFi apps, wrapped tokens play a critical role in expanding what’s possible with crypto.

Let’s break down what wrapped tokens are, how they work, and why they matter.

What are Wrapped Tokens?

1. What Is a Wrapped Token?

A wrapped token is a crypto token that represents another cryptocurrency on a different blockchain.

It’s “wrapped” in a digital wrapper that makes it compatible with the new chain, while still holding the value of the original asset.

Example:

• Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin on the Ethereum blockchain.

  
  

• 1 WBTC = 1 BTC, always backed 1:1 by real Bitcoin held in reserve.

  
  

2. Why Do Wrapped Tokens Exist?

Different blockchains operate in siloed environments.

You can’t use Bitcoin directly in Ethereum smart contracts — and that’s a problem for DeFi and cross-chain functionality.

Wrapped tokens solve this by allowing:

• Bitcoin to be used in Ethereum-based DeFi apps

  
  

• Ethereum assets to interact with Solana or BNB Chain ecosystems

  
  

• Greater liquidity and utility across blockchains

  
  

3. How Do Wrapped Tokens Work?

Here’s a simplified overview of the wrapping process:

1. You send your original token (e.g., BTC) to a custodian — a smart contract or trusted institution.

   
   

2. The custodian locks up your token and mints an equivalent wrapped version on the target blockchain (e.g., WBTC on Ethereum).

   
   

3. When you want your original asset back, the wrapped token is burned, and your original token is released from custody.

   
   

This ensures that each wrapped token is always backed 1:1 by the original.

4. Popular Wrapped Tokens

• WBTC (Wrapped Bitcoin) – Brings Bitcoin liquidity to Ethereum

  
  

• WETH (Wrapped Ether) – A compatible version of ETH for DeFi use

  
  

• renBTC, tBTC, hBTC – Alternative wrapped BTC tokens

  
  

• Wrapped AVAX, SOL, MATIC – Used in multi-chain DeFi platforms

  
  

Each has its own custodian model and use case.

5. Benefits and Risks of Wrapped Tokens

Benefits:

• Unlocks cross-chain DeFi and DEX trading

  
  

• Adds liquidity across ecosystems

  
  

• Enables use of non-native assets in smart contracts

  
  

Risks:

• Relies on trust in custodians

  
  

• Smart contract vulnerabilities

  
  

• Centralization concerns in some wrapping model

  
  

Choose wrapped tokens backed by reputable protocols with transparent reserves.

Understand how Wrapped Tokens work

Final Thoughts

Wrapped tokens are essential to a multi-chain crypto future.

They enable interoperability, bridge liquidity gaps, and let users take full advantage of different blockchain ecosystems.

As the crypto space moves toward greater decentralization and composability, wrapped assets will continue to play a vital role in connecting it all.