Blockchains are, by default, separate worlds: Bitcoin lives on Bitcoin, and Ethereum apps can’t use it directly. Wrapped tokens are the bridge that lets an asset from one chain be used on another \u2014 most famously Wrapped Bitcoin (WBTC), which is Bitcoin usable inside Ethereum’s DeFi ecosystem.<\/p>\n
A wrapped token is designed to represent another asset one-for-one. To create WBTC, real Bitcoin is deposited with a custodian or protocol, which then issues an equivalent amount of the wrapped token on the target chain. To redeem it, you return the wrapped token and get the underlying Bitcoin back. In theory, every wrapped token is fully backed by the real asset held in reserve.<\/p>\n
Wrapping unlocks liquidity. It lets Bitcoin holders lend, trade or provide liquidity in Ethereum-based DeFi without selling their Bitcoin, and it lets applications on one chain tap assets that live on another. It is a core piece of plumbing behind cross-chain finance.<\/p>\n
Wrapped tokens introduce a trust assumption: you are relying on whoever holds the underlying asset to actually hold it, one-for-one, and to honour redemptions. If that custodian or bridge is compromised \u2014 and bridges have been the target of some of crypto’s largest hacks \u2014 the wrapped token can lose its backing and its peg. Convenience comes with counterparty and smart-contract risk.<\/p>\n