Wrapped Token
A token pegged 1:1 to another asset and representing it on a different blockchain or in a DeFi-compatible format (e.g., WETH, WBTC).
Wrapped Token — A wrapped token is a tokenized representation of a cryptocurrency from one blockchain that can be used on a different blockchain or within smart contracts that require a specific token standard. Wrapped tokens maintain a 1:1 peg with the original asset through custodial or trustless minting and burning mechanisms.
How It Works
Creating a wrapped token involves depositing the original asset with a custodian or smart contract and receiving an equivalent amount of the wrapped version. For example, wrapping 1 BTC through the WBTC system involves sending BTC to a custodian (BitGo), who then mints 1 WBTC on Ethereum. To unwrap, you burn WBTC and receive BTC back.
The most common wrapped token is WETH (Wrapped Ether). Native ETH predates the ERC-20 standard and does not natively support the approve() and transferFrom() functions that DeFi protocols require. WETH wraps ETH into an ERC-20-compliant token, enabling it to interact seamlessly with all DeFi smart contracts. Wrapping ETH to WETH is a trustless, instant operation through a simple smart contract.
Beyond cross-chain wrapping, wrapped tokens are also used for liquid staking derivatives (stETH represents staked ETH), receipt tokens (aTokens in Aave represent deposited assets), and rebasing wrappers (wstETH wraps the rebasing stETH into a non-rebasing format compatible with more DeFi protocols).
Why It Matters in DeFi
Wrapped tokens are essential infrastructure for DeFi composability. Without WBTC, Bitcoin holders could not participate in Ethereum DeFi. Without WETH, Ethereum's native asset could not interact with standard AMM and lending contracts. Wrapped tokens bridge the gap between different token standards, blockchains, and protocol requirements.
The trust model behind wrapped tokens varies significantly. WETH wrapping is entirely trustless (a simple smart contract). WBTC requires trusting BitGo as custodian. Newer solutions like tBTC offer more decentralized Bitcoin wrapping. Understanding the trust assumptions behind each wrapped token is important for risk assessment.
Real-World Example
A Bitcoin holder wants to earn yield in DeFi. They wrap 5 BTC into 5 WBTC through a supported merchant, then deposit the WBTC into Aave on Ethereum as collateral. They borrow USDC against it and deploy the USDC into a Curve stablecoin pool for yield. The entire DeFi strategy is built on wrapped BTC — the original BTC remains locked with the WBTC custodian while the trader uses its tokenized representation across multiple protocols.
Related Terms
Native Token
The base cryptocurrency of a blockchain used to pay transaction fees (e.g., ETH on Ethereum, SOL on Solana, BNB on BNB Chain).
Read definition DeFi & AMMToken Pair
Two tokens that form a trading market in a liquidity pool, e.g., SOL/USDC or PEPE/WETH.
Read definition DeFi & AMMBase Token (Trading Pair)
In a trading pair, the base token is the one being bought or sold; the quote token is what it's priced in (e.g., in SOL/USDC, SOL is base).
Read definition DeFi & AMMSwap (DEX)
The act of exchanging one token for another on a decentralized exchange, executed through a smart contract.
Read definition DEX & ExchangeDecentralized Exchange (DEX)
A peer-to-peer trading platform where transactions are executed via smart contracts on-chain without a central intermediary.
Read definition DeFi & AMMDeFi Composability
The ability for DeFi protocols to interoperate and build on each other like financial Lego blocks due to open smart contracts.
Read definitionFrequently Asked Questions
Common questions about Wrapped Token in cryptocurrency and DeFi.
WETH is always redeemable 1:1 for ETH through a trustless smart contract, so they have the same value. The difference is technical: WETH is an ERC-20 token that works with DeFi smart contracts, while native ETH does not support the ERC-20 functions that most protocols require.
Trustless wraps like WETH cannot lose their peg because the wrapping contract always allows 1:1 redemption. Custodial wraps like WBTC could theoretically depeg if the custodian becomes insolvent or freezes assets, though this has not occurred with major wrapped tokens.
Most modern DEX interfaces handle wrapping automatically. When you swap ETH for a token on Uniswap, the router wraps your ETH to WETH behind the scenes. You typically only need to wrap manually when directly interacting with protocols that require WETH or other specific wrapped formats.
Ready to put your knowledge into practice?
Start Boosting