What is Wrapped Token

Intermediate

8m March 20, 2023

What is Wrapped Token?

Wrapped Token refers to a mapping/proxy asset (a token) that issues a native asset (a coin) from one blockchain (e.g. BTC in Bitcoin network) to another/multiple blockchains or its own blockchain (WETH is also on Ethereum chain).

For a list of Wrapped Tokens, you can check out the Wrapped Tokens tag on TokenInsight.

The issued wrapped tokens are backed and pegged 1:1 with the original asset (the native coin). Every wrapped token can be traced back to a locked coin on the original chain.

Wrapped Token mainly solves the problem of non-integration of original assets between different chains, and was the dominant solution before the emergence of Layer Zero.

After staking the original asset, a new representative Token is minted in another standard, and there can be multiple Wrapped Tokens for the same original asset as long as they meet different format standards (e.g. WBTC)

Why do we need Wrapped Token?

Blockchains such as Bitcoin and Ethereum is as separate distributed databases. As blockchains are separate, they can’t communicate easily with each other.

Almost every chain will have its own native asset Coin, and these Coins are also not interoperable due to the different nodes and consensus.

For more information, check out “What is Node” and “What is Consensus Mechanism”

You can’t use your Bitcoin directly on the Ethereum blockchain, because only the Bitcoin blockchain “knows” that you hold Bitcoin.

Wrapped tokens were created as a solution to this problem. It uses a new token to represent the original asset's value. With wrapped tokens, you can effectively move assets between blockchains and use them across the crypto ecosystem.

The core logic of Wrapped Token is it is just a representation. The point of this, is that some blockchain can do things that other blockchains can't. Meanwhile, different coins are not available for other chains. So the early developers made representations and called them wrapped tokens so that you can essentially have the main coin, but use it on any other chains.

Examples of Wrapped Token

One of the best-known wrapped tokens is Wrapped Bitcoin (WBTC), created by BitGo, Kyber, and Ren in 2019. WBTC is an ERC-20 standard token linked 1:1 to BTC and circulating in the Ether network. (WBTC also has a version of the TRC-20 standard that circulates in the Tron network)

WBTCs are created and issued (Minting) through a custodian. There are various types of custodians, which can be merchants, multi-signature wallets, DAOs, or even smart contracts. Anyone can mint and issue WBTC by finding the right custodian; the user first sends the BTC from the Bitcoin network to the custodian's wallet, who treats it as collateral and deposits / locks it in the Digital Vault, and then mint it 1:1 on the Ethereum (or Tron) network via their own smart contract, completing the wrapping process.

Similarly, users can request to burn WBTC and redeem their original BTC assets (Bitcoin network).

If you hold BTC Coin in the Bitcoin network, you can simply lock your BTC and mint WBTC on Ethereum mainnet to borrow other Tokens or earn interest in a protocol like AAVE.

Popular Wrapped token: Wrapped BTC, renBTC, Wrapped ETH (0x Labs created in 2017, is an ERC-20 standard Token in the Etherum network, representing the value of ETH. Because ETH itself is not an ERC-20 Token, many DApp functions are not suitable for ETH. The wrapped token is more convenient to use).