A type of digital token (digital asset) that represent cryptocurrencies and similar assets on non-native blockchains, so that they can be used outside of their original networks. Wrapped tokens enable cross-chain compatibility and provide more liquidity to the market. Additionally, these assets provide more flexibility of decentralized finance (DeFi) ecosystems.

Wrapped tokens operate by locking the original cryptocurrency in a digital vault (the original network) and issuing a new token on a different blockchain that reflects the original asset’s value.

Wrapped tokens are linked to a certain coin but can operate on a different blockchain network. For example, wrapped bitcoin, or WBTC, is a cryptocurrency that derives its value from bitcoin pricing but may be used on other networks, e.g., the Ethereum network. Wrapped tokens are perceived as stablecoins relatives, that are designed to enhance interoperability between different blockchains. Hence, these tokens enable cryptocurrencies from one blockchain to be used on another, and hereby overcoming certain limitations on an original blockchain, and maintaining the value of the respective underlying assets.

A wrapped token allows different uses and the transfer of value across various blockchains. Particularly, it cross-functions and interoperates on non-compatible cryptocurrencies and blockchains. For example, a wrapped token can be exchanged on its non-native blockchains, and can be redeemed (or “unwrapped”) for the underlying asset. For wrapped tokens to seamlessly operate, a custodian (custodians can be a vendor, a multisig wallet, or a smart contract, among others) holds an equivalent amount of the asset as the wrapped amount.

The main benefits of wrapped tokens include enhanced liquidity, and improved levels of interoperability between networks, and access to DeFi ecosystem across platforms. However, reliance on trusted custodians to hold the original assets may pose the risk of potential failure associated with a centralized point (a centralized system in an otherwise decentralized ecosystem).