Wrapped Tokens
Wrapped tokens are digital assets on one blockchain that represent a 1:1 pegged equivalent of an asset from another blockchain or the same chain, enabling cross-chain compatibility or enhanced functionality.
What is Wrapped Tokens?
Wrapped tokens are created to allow assets to operate on blockchains where they are not natively supported, facilitating interoperability in decentralized finance (DeFi) and other applications. They are backed by the original asset, held in custody by a trusted entity or smart contract, ensuring a 1:1 redemption ratio. For example, Wrapped Bitcoin (WBTC) brings Bitcoin (BTC) to Ethereum, allowing BTC to be used in Ethereum-based DeFi protocols like Aave or Uniswap. Similarly, Wrapped Ether (WETH) converts Ether (ETH), Ethereum’s native cryptocurrency, into an ERC-20 token compliant with Ethereum’s token standard, enabling its use in smart contracts and decentralized applications (dApps). As of September 2025, wrapped tokens like WBTC and WETH underpin over $10 billion in DeFi total value locked (TVL), per DeFiLlama data.
WBTC, managed by a consortium including BitGo, is minted when users deposit BTC into a custodial vault, receiving WBTC on Ethereum at a 1:1 ratio (e.g., 1 BTC = 1 WBTC, ~$65,000 in 2025). WBTC’s $10 billion market cap supports lending on Compound (e.g., 5% APY borrowing) or trading on Uniswap, with $500 million in daily volume. WETH, with a $30 billion market cap, is created by depositing ETH into a smart contract (e.g., 1 ETH = 1 WETH, ~$3,000), enabling its use in Uniswap V3 pools, where it accounts for 60% of liquidity pairs. Risks include custodial centralization for WBTC (BitGo holds keys) and smart contract vulnerabilities, as seen in a 2023 exploit draining $5 million from a wrapped token bridge. Users can unwrap tokens to reclaim the original asset, ensuring flexibility, but must monitor fees (e.g., 0.1% redemption fees for WBTC) and blockchain gas costs ($2-$10 on Ethereum). Wrapped tokens are critical for DeFi’s $75 billion ecosystem, enabling seamless asset utility across chains.
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