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What Are Wrapped Tokens in Crypto?

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Eliman Dambell

Author

Eliman Dambell

About Author

Eliman Dambell was a news writer and editor at Bitcoin.com, FXStreet and Investing.com. He commentates on various markets, including Crypto, Stocks and FX.

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Last updated:

December 5, 2024

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Wrapped tokens have long been a staple within the world of crypto, and act as a bridge between different blockchain networks. This category has grown to be a dominant force within the wider crypto ecosystem and currently has a market capitalization of over $27 billion. This is more than the Metaverse, Governance, and Gaming segments of the marketplace.

In this guide, we will explore why this concept has become vastly popular, detail its benefits, use cases, and risks, and fully answer the question of what is a wrapped crypto coin.

What Is a Wrapped Token?

A wrapped token is a digital asset that represents another cryptocurrency on a different blockchain. For example, Wrapped Bitcoin (WBTC) represents Bitcoin (BTC) on the Ethereum network. The value of a wrapped token is pegged to the value of the original asset, maintaining a 1:1 ratio. This ensures that the wrapped token mirrors the price of the underlying cryptocurrency. At the time of writing this, WBTC is trading at $63,295.99 – the same price as BTC, which recently jumped to a multi-week high following an assassination attempt on Donald Trump.

Wrapped tokens are assets pegged to another cryptocurrency’s value that operate on a different blockchain. This technology has increased liquidity, interoperability, and flexibility within the crypto ecosystem, allowing users to utilize their assets seamlessly across multiple platforms.

The process involves locking the original cryptocurrency in a smart contract and issuing an equivalent amount of the wrapped token on the target blockchain. This ensures that the wrapped token maintains a 1:1 peg with the original asset, providing seamless cross-chain functionality.

WBTC

Wrapped tokens work by ensuring that the total supply of the original asset remains unchanged while the wrapped token can be used on the new blockchain. The original asset is securely stored, and the wrapped token can be redeemed for the original asset at any time.

The primary purpose of wrapped coins is to enable the use of cryptocurrencies on blockchain networks where they are not natively supported. This enhances the liquidity and utility of the assets, allowing them to be used in various DeFi protocols, traded on different exchanges, and integrated into a wide range of dApps.

How Does Wrapping Work in Crypto?

Now that you know what a wrapped crypto token is, let’s look at how wrapped tokens work. In order to ensure general security and price accuracy of the wrapped asset, a token needs to go through several steps Initially, the original cryptocurrency is deposited into a custodial service or a smart contract. This entity is responsible for holding the original asset securely. Once the deposit is confirmed, an equivalent amount of the wrapped token is minted and issued on the target blockchain.

The minting process is managed by a trusted entity or a decentralized protocol, which guarantees that the equivalent amount of the original asset always backs the wrapped tokens. This system maintains the 1:1 peg between the wrapped token and the underlying asset. When a user wants to convert the wrapped token back to the original cryptocurrency, the wrapped tokens are burned, and the original asset is released from the custodial service or smart contract.

The wrapping and unwrapping processes ensure that the total supply of the original asset remains constant, preserving its value and integrity. This mechanism allows users to leverage the benefits of different blockchain networks while maintaining the value and security of their original assets.

Types of Wrapped Tokens

So, what is wrapped crypto, and how many cryptocurrencies are currently wrapped? There are several types of wrapped crypto; below are some of the main ones within the ecosystem.

Wrapped Bitcoin (WBTC)

Wrapped Bitcoin token (WBTC) is an ERC-20 token representing Bitcoin on the Ethereum blockchain. WBTC allows Bitcoin holders to use their BTC in Ethereum-based applications, such as DeFi protocols and decentralized exchanges.

This integration provides Bitcoin liquidity to the Ethereum ecosystem, enhancing its overall utility. Additionally, it enables BTC holders to access decentralized finance without having to swap their holdings for another crypto. Back in 2020, Wrapped tokens helped lead to a BTC price rally. The current price of WBTC, as mentioned above, is over $63,000, with a market cap of $9.7 billion.

Wrapped Ether (WETH)

Next is Wrapped Ether (WETH), which is an ERC-20 token that represents Ether (ETH) on the Ethereum network. Unlike native ETH, WETH is fully compatible with all ERC-20 dApps and smart contracts.

This compatibility simplifies transactions and interactions within the Ethereum ecosystem, making using ETH in various applications easier. Wrapped Ether is mostly used for trading and swapping on decentralized apps, as most dApps support operations involving ERC-20, and an ERC-20 equivalent of ETH is easier to use than the ETH coin itself. At the time of writing, this token has a market cap of $11,460,124,505.

Wrapped BNB (WBNB)

Valued at $900 million, Wrapped BNB (WBNB) represents Binance Coin (BNB) on different blockchains, such as Ethereum or Binance Smart Chain. WBNB enables BNB holders to utilize their tokens in cross-chain DeFi applications and other blockchain-based services, increasing the flexibility and reach of BNB.

Wrapped Litecoin (WLTC)

Another prominent wrapped token is Wrapped Litecoin (WLTC) – a token that represents Litecoin (LTC) on the Ethereum blockchain. WLTC allows Litecoin holders to participate in Ethereum-based DeFi protocols and other dApps, providing greater liquidity and utility for LTC within the Ethereum network.

What Are Wrapped Tokens Used For?

Now that you are familiar with the different types of wrapped tokens, it is time to explore the various use cases they hold.

Using Cryptocurrencies on Different Networks

One of the primary use cases for wrapped tokens is to enable the use of cryptocurrencies on different blockchain networks. For instance, wrapped tokens allow Bitcoin, originally designed for its native blockchain, to be utilized within the Ethereum ecosystem. This cross-network compatibility enhances the liquidity and functionality of cryptocurrencies, allowing users to access a broader range of financial services and applications.

Creating Compatibility with dApps

Wrapped tokens facilitate the integration of various cryptocurrencies into decentralized applications (dApps) that are designed for specific blockchain networks. By converting their assets into wrapped tokens, users can participate in DeFi protocols, yield farming, lending, and other dApp functionalities that would otherwise be inaccessible to their native cryptocurrencies.

Reduced Transaction Fees

Using wrapped tokens can lead to reduced transaction fees, especially when moving assets between different blockchain networks. For example, transferring Ethereum-based assets can be more cost-effective using wrapped tokens on networks with lower fees, such as Binance Smart Chain. This cost efficiency makes wrapped tokens an attractive option for frequent traders and users of DeFi services.

Drawbacks of Wrapped Tokens

Despite several advantages, wrapped tokens also come with their own set of drawbacks. These include centralization, the risk of depegging, and the overall costs of operating them.

Centralization Risk

One of the main drawbacks of wrapped tokens is the centralization risk. The process of wrapping typically involves a custodial entity or smart contract that holds the original assets. If these entities are compromised or fail to maintain the security of the original assets, it could lead to significant losses for the token holders.

Risk of Depegging

Wrapped tokens are pegged to the value of the underlying asset at a 1:1 ratio. However, there is always a risk of depegging, where the value of the wrapped token diverges from the value of the original asset. This can occur due to issues in the wrapping process, market inefficiencies, or lack of trust in the custodial entities.

Cost and Complexity

Lastly, the process of wrapping and unwrapping tokens can be complex and may incur additional costs. Users need to understand the technicalities involved and may face transaction fees during the conversion process. These factors can make the use of wrapped tokens less attractive for some users, particularly those who are less technically savvy or are engaging in small-scale transactions.

Wrapped Crypto vs. Bridging

A comparison is often made between Wrapped Crypto and Bridiging, so let’s briefly go through this. Wrapped tokens and bridging serve similar purposes but operate differently. Wrapped tokens involve creating a new token on a different blockchain that represents the original asset.

Bridging, on the other hand, involves transferring the actual asset from one blockchain to another through a bridge protocol. While wrapped tokens provide a straightforward way to use assets on different networks, bridging can offer a more direct transfer of assets but may involve higher complexity and risks.

Conclusion

So what does wrapped mean in crypto? Wrapped tokens have revolutionized the cryptocurrency space by enhancing the interoperability and utility of various digital assets. By allowing cryptocurrencies to be used across different blockchain networks, wrapped tokens provide greater liquidity, flexibility, and access to a wide range of applications. However, they also come with risks and complexities that users must understand and manage.

As the cryptocurrency ecosystem continues to evolve, the role of wrapped tokens is likely to expand, offering new opportunities and challenges. Users should weigh the benefits and drawbacks carefully and stay informed about best practices for using wrapped tokens securely.

FAQs

What does wrap mean in crypto?

In crypto, wrapping refers to the process of converting a cryptocurrency into a wrapped token that can be used on a different blockchain while maintaining its original value.

Are wrapped tokens risky?

Wrapped tokens carry risks, such as centralization risk, risk of depegging, and the complexities involved in the wrapping process. Users must understand these risks before using wrapped tokens.

Is WBTC the same as BTC?

WBTC is not the same as BTC; it is an ERC-20 token that represents Bitcoin on the Ethereum blockchain, maintaining a 1:1 peg with BTC.

Can a wrapped token value fall?

Yes, the value of a wrapped token can fall if it depegs from the value of the underlying asset due to market inefficiencies, trust issues, or problems in the wrapping process.