What is a wrapped token?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A wrapped token is a representation of one asset issued on another chain or under another standard, backed by the original held in custody. WBTC, which brings Bitcoin onto Ethereum, is the familiar example. The backing rests on whoever holds the collateral, and their trustworthiness is the risk.
Key points
- The original is locked and a token is issued against it
- Designed to be backed one-for-one
- The custodian or bridge is a single point of failure
- Also used within one chain, as WETH does, to unify standards
Definition
A token issued on another chain or standard to represent an equivalent amount of an asset held in custody or locked, redeemable back into the original.
Bitcoin cannot be used directly by Ethereum smart contracts. So bitcoin is placed with a custodian and an ERC-20 token is issued against it. That is WBTC in outline: minted against deposits, burned on redemption.
The same idea appears within a single chain. Ether itself is not an ERC-20, so protocols built around ERC-20 cannot handle it directly. Depositing ETH into a contract and receiving WETH puts it on the same code path as every other token — here the custodian is a contract rather than a company.
Where the risk sits depends on the design. With a corporate custodian, insolvency or misconduct can break the backing; with a contract or bridge, a flaw in the code can. Whether reserves are published in a form outsiders can verify is one of the things worth checking.
Watch out for
- · If the custodian fails or misbehaves, the basis for the wrapped token's value goes with it
- · Exploiting a bridge to mint tokens without backing has caused very large losses
- · Similarly named wrapped tokens from different issuers are not interchangeable