Wrapped token

A wrapped token is a token that represents another asset one to one on a different blockchain or in a different format, such as WBTC for BTC on Ethereum or WETH for ETH.

How it works

You cannot use bitcoin directly in Ethereum DeFi, they are separate networks. So real BTC is locked with a custodian or in a contract, and the same amount of WBTC is minted on Ethereum. When you redeem WBTC, it is burned and the BTC is released.

There are also wrappers inside one network: WETH is ETH in the standard ERC-20 token format so smart contracts can handle it easily. You can unwrap it 1:1 through the contract at any time.

The main risk is whoever holds the original. If the custodian or bridge is hacked, goes bust or freezes funds, the wrapped token can lose its link to the original price. So WBTC is not BTC, it is a claim on whoever holds the BTC.

Example with numbers

You wrap 0.5 BTC and get 0.5 WBTC on Ethereum. You post it as collateral in DeFi and borrow stablecoins. While the custodian behaves, 0.5 WBTC is worth the same as 0.5 BTC, say $30,000 at $60,000 per BTC. If something happens to the custodian, WBTC can trade at a clear discount.

Common mistake

A common mistake is treating a wrapped token as the same asset and ignoring who holds the original. Find out who the custodian is or how the bridge works, whether reserves are proven, and do not keep more in wrapped form than you need for a specific purpose.

Questions and answers

What is a wrapped token in simple terms?

It is a copy of an asset on another network, backed 1:1 by the original. The original is locked and the copy can be used in DeFi.

What is the difference between WETH and ETH?

WETH is the same ETH in ERC-20 token format. You can swap it back 1:1 through its smart contract.

Is WBTC safe?

It is only as safe as the custodian holding the real BTC. If the reserves vanish, WBTC loses its value.

Wrapped token

How it works

Questions and answers

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