What is Wrapped Token (WBTC / wETH)

A wrapped token is a cryptocurrency that represents another asset, typically from a different blockchain, on a host chain, maintaining a 1:1 value peg to the original asset. Wrapping solves one of blockchain's fundamental limitations: assets on separate chains cannot natively interact. Wrapped tokens create interoperability by tokenising one chain's asset on another.

THE MOST IMPORTANT EXAMPLE: WBTC (WRAPPED BITCOIN)

Bitcoin's $1 trillion market cap is largely excluded from Ethereum's DeFi ecosystem. Bitcoin cannot natively participate in Uniswap, Aave, or Compound because it operates on a completely separate blockchain. WBTC solves this: 1 WBTC = 1 BTC in value, but WBTC is an ERC-20 token on Ethereum. Bitcoin holders can deposit BTC with custodian BitGo, receive WBTC at 1:1, and then deploy the WBTC across Ethereum's DeFi protocols to earn yield, borrow against it, or provide liquidity.

HOW WRAPPING WORKS (CUSTODIAL MODEL)

The standard custodial wrapping process: A user sends their native asset (e.g., BTC) to a trusted custodian (BitGo for WBTC). The custodian locks the BTC in a verifiable on-chain address. An equivalent amount of wrapped tokens is minted on the target chain (e.g., WBTC on Ethereum). The user receives the wrapped tokens and can use them in DeFi.
To unwrap: the wrapped tokens are burned, and the custodian releases the original asset. WBTC is governed by a DAO of merchants and custodians who can be verified by on-chain proof-of-reserve.

NON-CUSTODIAL WRAPPING

Trustless wrapping protocols use smart contracts and cross-chain bridges rather than a centralised custodian: Ren Protocol (now defunct), tBTC (Threshold Network), a decentralised Bitcoin custody system using threshold cryptography to eliminate the single-custodian risk. THORChain enables native asset swaps without wrapping at all.

RISKS OF WRAPPED TOKENS

Custodial risk: For WBTC, BitGo holds the Bitcoin. If BitGo is hacked, faces regulatory issues, or becomes insolvent, WBTC could lose its backing.
Bridge risk: For bridge-wrapped tokens, smart contract vulnerabilities can allow attackers to mint unbacked wrapped tokens, the mechanism behind several large bridge exploits.
Liquidity risk: During market stress, wrapped token liquidity can thin and the peg may temporarily deviate.

WBTC ON-CHAIN STATSWBTC

has become one of the largest assets by TVL in DeFi, with billions in WBTC are deployed across Aave, Compound, Curve, and Uniswap. The ability to earn ETH-native DeFi yields on Bitcoin value has been transformative for capital efficiency in crypto.

Terms in addition to the Wrapped Token (WBTC / wETH)

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.