Wrapped token
Also called: wrapped asset · WBTC · WETH
Definition
A wrapped token is a token on one blockchain that represents another asset one-to-one, such as WBTC representing bitcoin on Ethereum, backed by the original asset held by a custodian or smart contract.
This entry is shown in English.
How Wrapped token works
Bitcoin cannot run Ethereum smart contracts. To use BTC in Ethereum DeFi, a custodian or protocol holds real BTC and issues an ERC-20 token, such as WBTC or cbBTC, for each BTC held. To unwrap, the token is burned and the BTC released.
Some wrapping is simpler. WETH wraps native ETH into an ERC-20 token on Ethereum itself, through a smart contract with no custodian, so apps can treat ETH like other tokens. Bridged tokens on other chains are also a form of wrapped asset.
The value of a wrapped token depends on its backing and the ability to redeem it. If the custodian, bridge or contract fails, the wrapped token can trade below the original asset. Check who holds the reserves and whether they publish proof of them.
Example
Say you hold 0.5 BTC and want to use it as collateral on Ethereum. You exchange it for 0.5 WBTC, which a custodian backs with 0.5 BTC. You deposit the WBTC in a lending protocol and borrow stablecoins. Months later, you repay, withdraw your 0.5 WBTC and convert it back to native BTC. If the wrapped token had lost its backing in the meantime, it could have been worth far less than 0.5 BTC.
Common mistakes
- Assuming a wrapped token carries no risk beyond the price of the original asset.
- Sending a wrapped token to an address on the original chain, for example WBTC to a Bitcoin address.
- Confusing different wrapped versions of the same asset that are not interchangeable.
Learn and practise
FAQ
Is WBTC the same as BTC?
WBTC tracks BTC one-to-one but is an Ethereum token backed by BTC held by a custodian. It adds custodian and smart contract risk.
Why do I need WETH?
Some DeFi apps require tokens in ERC-20 format. WETH converts ETH into that format one-to-one and can be unwrapped at any time.