What Is a Wrapped Token?

Bitcoin can't natively exist on Ethereum — the two blockchains don't talk to each other. A wrapped token solves this by creating a stand-in: an ERC-20 token on Ethereum, like Wrapped Bitcoin (WBTC), backed 1:1 by real BTC held in reserve somewhere else.

You send BTC to a custodian or a bridge contract. In exchange, you receive an equal amount of WBTC on Ethereum, which you can now trade on DEXs, use as collateral in DeFi, or hold in any Ethereum wallet. When you want your original BTC back, you burn the WBTC and redeem it — the custodian releases the locked reserve. The wrapped token's price tracks the original asset because it's redeemable for it; if it drifted too far from BTC's price, arbitrage would correct it fast.

This is the part worth understanding before you hold one: a wrapped token is only as good as whatever is backing it. WBTC relies on a custodian (currently a consortium including BitGo) actually holding the reserve BTC and honoring redemptions. Other wrapped assets use bridge smart contracts instead of a company — which shifts the risk from "will the custodian behave honestly" to "is the bridge contract secure," and bridge hacks have been among the largest exploits in crypto history.

A wrapped token is a claim on an asset, not the asset itself. Before holding a large position in one, know who or what is backing it, and remember that a de-peg — the wrapped token trading below the real asset — is usually a sign the market has started doubting that backing.