Wrapped token
A wrapped token is a token that represents crypto in a different technical form. This lets crypto be used on a blockchain where it doesn’t originally exist.
What is a wrapped token?
A blockchain is a digital ledger that records transactions. Each blockchain has its own technical rules. That’s why, for example, bitcoin doesn’t automatically work in apps on Ethereum.
A wrapped token is a separate version of a token that follows the rules of another network. The original crypto usually remains locked up. In a fully backed setup, each wrapped token corresponds to one unit of the original crypto.
The name “wrapped” doesn’t guarantee anything. A token isn’t always fully backed or directly redeemable. The rules vary by provider and bridge, a system that helps represent value across blockchains.
An example of a wrapped token
WETH is a wrapped version of ETH. Someone can deposit 1 ETH into a smart contract. A smart contract is a program on a blockchain that automatically follows set rules. That person then receives 1 WETH.
WETH follows Ethereum’s ERC-20 standard. This means apps that only handle tokens of this kind can use WETH. When it’s exchanged back, the WETH is removed and the ETH is unlocked.
Why are wrapped tokens important in crypto?
Wrapped tokens make crypto usable in apps and on networks that don’t support the original coin. For example, a token that represents bitcoin can be used in Ethereum apps. This can also provide access to trading and other uses on another network.
Wrapped tokens may come up in crypto news about bridges, new token versions, or DeFi apps. The main thing to understand is that the original crypto usually doesn’t literally travel to the other blockchain. A new representation of its value appears there.
Wrapped tokens come with extra risks. A custodian, bridge, or smart contract may be involved. Problems, a hack, or errors in this extra layer can make the token harder to redeem or less valuable than the underlying crypto.
