Cryptocurrencies like Ethereum and Bitcoin typically can't be traded directly across different blockchains. Attempting to trade Bitcoin on the Ethereum blockchain without compatibility solutions is like trying to run a PC game on a Mac—it simply won't work without specialized software.
Wrapped tokens solve this problem by creating interoperability between incompatible blockchains. This guide explores wrapped tokens, their benefits, and how they work.
What Are Wrapped Tokens?
Wrapped tokens are blockchain-based assets that represent another cryptocurrency from a different blockchain or token standard. They maintain the same value as the original asset while enabling functionality on non-native chains. Key advantages include:
- Enhanced interoperability between incompatible cryptocurrencies/blockchains
- Expanded utility (e.g., Bitcoin lending on Ethereum DeFi platforms)
- Increased liquidity for decentralized services
Two prominent examples are Wrapped Bitcoin (WBTC) and Wrapped Ethereum (WETH).
Bitcoin Wrapped Token (WBTC)
WBTC is an ERC-20 token representing Bitcoin on the Ethereum blockchain. As of 2022, it held over 80% market share among wrapped tokens with $10+ billion in market capitalization.
How WBTC Works
- Users deposit BTC with authorized merchants
- Custodians mint equivalent WBTC (1:1 ratio)
- WBTC can be used across Ethereum DeFi protocols
- To redeem: WBTC is burned, and original BTC is returned
👉 Discover how WBTC boosts DeFi liquidity
Key Considerations
- Requires trust in custodian (currently BitGo)
- Enables yield generation for Bitcoin holders
- Available on both centralized and decentralized exchanges
Ethereum Wrapped Token (WETH)
Introduced in 2017, WETH converts native ETH into an ERC-20 compliant version for enhanced DeFi compatibility.
WETH Use Cases
- Trading ETH against other ERC-20 tokens
- Participating in DeFi protocols requiring ERC-20 tokens
- Simplified smart contract interactions
Conversion Process
- Users swap ETH for WETH via smart contracts or wallets
- Fully reversible process (1:1 ratio maintained)
- Future Ethereum upgrades may eliminate need for WETH
FAQ
Why use wrapped tokens instead of native assets?
Wrapped tokens enable cross-chain functionality while maintaining asset value—essential for DeFi participation and accessing services on incompatible blockchains.
Are wrapped tokens safe?
While generally secure, they introduce custodial risk (for WBTC) and smart contract risk. Always verify custodians and audit reports before use.
How do I convert wrapped tokens back to original assets?
Most wrapped tokens can be redeemed through authorized merchants or decentralized protocols by burning the wrapped version to release the original asset.
👉 Explore wrapped token trading strategies
Conclusion
Wrapped tokens represent a crucial innovation in blockchain interoperability, particularly for Bitcoin and Ethereum ecosystems. By enabling cross-chain functionality, they expand DeFi possibilities while maintaining asset value parity. As blockchain technology evolves, wrapped token mechanisms may become more streamlined or even obsolete—but currently serve as vital bridges between isolated networks.