A wrapped token is a cryptocurrency that is issued on a blockchain different from the one it represents. It enables the interoperable use of assets on a blockchain that is not the token’s native network, with wrapped tokens existing across the blockchain ecosystem, including dApps, DEXs, and DeFi protocols.
Even though they are used on a non-native network, wrapped tokens are typically pegged 1:1 to the original assets. This process is enabled by the locking of the original crypto assets in reserve on the native network (for custodial wrapping models) and then issuing on the other blockchain. For instance, Wrapped Litecoin (WBTC) facilitates the use of BTC on DeFi platforms based on Ethereum, but the value of the token is identical to BTC.
There are multiple upsides to the wrapped token concept, as it increases the interchangeability of assets across networks, protocols, and ecosystems. Nevertheless, the additional risks stemming from their use shouldn’t be ignored. Specifically, overreliance on custodians, smart contract weaknesses, and the possibility of the peg not remaining 1:1.
