Wrapped Token
In simple terms
A wrapped token is a stand-in. The original asset is locked somewhere and a matching token is issued on the chain where you want to use it, so it can be traded in places the original cannot reach.
Definition
A token on one blockchain that represents an asset held on another, or in a different form.
In depth
Wrapping locks an asset with a custodian or a bridge contract and mints a claim on the destination chain, redeemable one for one. The wrapper's value depends entirely on the backing arrangement: a centralised custodian introduces counterparty risk and attestation quality as the binding questions, while a bridge introduces smart-contract and validator-set risk. Wrapping is also used within a chain to give a native asset a standard token interface, so that contracts expecting that interface can handle it uniformly.
How does Wrapped Token work?
A user sends the original asset to a custodian or bridge contract, which locks it and mints an equal amount of the wrapped version on the destination chain. The wrapped token trades and is used like any other token there. Redeeming burns it and releases the original. The peg holds only while the backing is real and redemption works, and arbitrage keeps the market price near parity while both conditions are true.
An example
Wrapping an illustrative 1 BTC produces 1 unit of a wrapped bitcoin token usable in Ethereum DeFi. Its value rests on the custodian genuinely holding the bitcoin and honouring redemptions. If either fails, the wrapper can trade well below the asset it represents while the original stays locked.
Figures are illustrative only.
What beginners get wrong
- Treating a wrapped asset as identical to the original. It is a claim on the original, and the claim can fail.
- Not checking who or what holds the backing, and how often it is attested.
- Assuming all wrappers of the same asset are interchangeable. Different issuers are different risks, and they are not fungible with each other.
Related terms
Part of
What is DeFi, and how does decentralized finance work? — the subject page for defi, with all 18 of its definitions in one place.
Educational only — not financial advice.