A wrapped token is a representation of one cryptocurrency on a different blockchain. It holds the same value as the original asset and can be redeemed for it, but it exists as a different token on a different chain or network. WBTC (Wrapped Bitcoin) is Bitcoin represented as an ERC-20 token on Ethereum. wETH is ETH wrapped to conform to the ERC-20 standard so it can be used in DeFi protocols that require ERC-20 token interfaces. Wrapping lets assets from one ecosystem be used in another without moving the underlying itself.
How wrapped tokens work
Two wrapping models exist. In custodial wrapping (WBTC), a centralized custodian (BitGo for WBTC) holds the actual Bitcoin in reserve and mints an equal number of WBTC tokens on Ethereum. To redeem WBTC for BTC, you go through a KYC merchant who burns the WBTC and instructs BitGo to release the BTC. The trust assumption is that BitGo holds 1:1 reserves and will process redemptions honestly.
In bridge-based wrapping, your original token is locked in a smart contract on the source chain and a corresponding wrapped token is minted on the destination chain. When you bridge back, the wrapped token is burned and the original is unlocked. The trust assumption shifts from a custodian to a smart contract.
What this means for traders
The main risk in holding wrapped tokens is the custodian or bridge contract that backs them. WBTC’s security depends on BitGo holding honest reserves. Bridge-based wrapped tokens carry smart contract risk: if the bridge contract is exploited, the wrapped token loses its backing. The Ronin bridge hack in March 2022 resulted in $625 million in wrapped tokens losing their backing when the underlying reserves were stolen. Holders of those wrapped tokens received nothing immediately.
Wrapped tokens on well-audited bridges carry lower risk but never zero risk. For the bridge mechanics behind wrapping, see cross-chain bridges explained. For how wrapped tokens are used across L2s, see layer 2 crypto explained.
A concrete example
You want to earn yield on Bitcoin in an Ethereum DeFi protocol. You cannot put native BTC directly into Aave. Instead, you convert 1 BTC to 1 WBTC through BitGo’s merchant system or a centralized exchange. You deposit WBTC in Aave as collateral and borrow USDC against it. Your collateral value tracks BTC price; your borrowed amount is in USDC. To exit, you repay the USDC loan, withdraw WBTC, and convert back to native BTC through the same process. The round trip adds BitGo custodial exposure to your position for the entire duration.
Frequently asked questions
Is wETH the same as ETH?
wETH is ETH that has been wrapped to conform to the ERC-20 standard. Native ETH predates ERC-20, so it behaves differently from ERC-20 tokens in smart contracts. Many DeFi protocols require wETH rather than native ETH. Wrapping ETH to wETH and back is a 1:1 conversion with a small gas cost.
What happened to wrapped tokens on collapsed bridges?
When the Nomad bridge was exploited in August 2022 for $190 million, all assets bridged through Nomad lost their backing. Holders of Nomad-bridged assets received cents on the dollar in the recovery process. This is the direct consequence of bridge-based wrapping: the wrapped token’s value is entirely dependent on the bridge contract holding the backing assets.
How do you verify that a wrapped token is fully backed?
For custodial wrapped tokens like WBTC, BitGo publishes on-chain proof of reserves. You can compare the WBTC total supply on Etherscan against the BTC held in the declared reserve addresses. For bridge-based wrapped tokens, compare the token supply on the destination chain against the total locked in the source-chain bridge contract using their respective block explorers.
