What is a Wrapped Token?
A wrapped token is a cryptocurrency that represents another cryptocurrency on a different blockchain, backed 1:1 by the original asset locked in a vault. The most common example is WETH (Wrapped ETH) — an ERC-20 version of native ETH that can be used in DeFi protocols.
Native ETH (the base currency of Ethereum) is not ERC-20 compatible. Since most DeFi protocols (Uniswap, Aave, Compound) require ERC-20 tokens for their smart contracts, ETH must be “wrapped” into WETH to participate. The same concept applies to Bitcoin (WBTC), Avalanche (WAVAX), and many other assets.
As of 2025, over $20 billion worth of assets are wrapped across all chains, with WETH and WBTC being the most widely used.
Why Wrapped Tokens Exist
1. ERC-20 Compatibility
Native ETH predates the ERC-20 standard. ERC-20 defines a standard interface for tokens (transfer, approve, balanceOf), but ETH doesn’t implement this interface. WETH was created to solve this:
Want to swap ETH for USDC on Uniswap?
Can't — Uniswap pools require ERC-20 tokens.
Solution: Wrap ETH → WETH (ERC-20) → Swap WETH for USDC2. Cross-Chain Representation
Bitcoin lives on its own blockchain. To use BTC in Ethereum DeFi, it must be locked on Bitcoin and represented as WBTC on Ethereum:
BTC on Bitcoin blockchain → Lock in custody → Mint WBTC on Ethereum
WBTC on Ethereum → Burn → Unlock BTC on Bitcoin blockchain3. Yield-Bearing Tokens
Some wrapped tokens earn yield while representing the original asset:
| Token | Backed By | Yield Mechanism |
|---|---|---|
| stETH | ETH | Staking yield (Lido) |
| rETH | ETH | Staking yield (Rocket Pool) |
| cbETH | ETH | Staking yield (Coinbase) |
| wstETH | stETH | Wrapped stETH for DeFi composability |
| yvUSDC | USDC | Yield from Yearn vaults |
How Wrapping Works
Wrapping ETH → WETH
- You send native ETH to the WETH contract
- The contract locks your ETH
- The contract mints an equal amount of WETH to your address
- WETH is now in your wallet as an ERC-20 token
- To unwrap: send WETH back to the contract, receive native ETH
This process is instant and costs one transaction (gas fee only). Most interfaces (Uniswap, MetaMask) wrap/unwrap automatically when needed.
WBTC (Wrapped Bitcoin) Process
- Custodian (BitGo) holds BTC in cold storage
- Merchant requests WBTC minting by sending BTC to the custodian
- Custodian confirms receipt and mints WBTC on Ethereum
- User receives WBTC, which is usable in DeFi
WBTC is managed by BitGo (custodian), Kyber Network and Ren (originally). The custody is centralized — you’re trusting BitGo to hold the BTC.
Wrapped vs Native Assets
WETH vs ETH
| Feature | ETH | WETH |
|---|---|---|
| Standard | Native coin | ERC-20 token |
| DeFi compatibility | Limited (some protocols accept it) | Full (all ERC-20 protocols) |
| Can send to contracts | Yes | Yes |
| Approve for spending | No | Yes (approve/allowance) |
| Wrapping cost | Free (it IS the base asset) | Gas for wrap/unwrap tx |
| Value | 1 ETH = 1 WETH (always) | 1:1 peg |
Native USDC vs Bridged USDC
This is a critical distinction:
| Token | Issuer | Chain | Risk |
|---|---|---|---|
| USDC | Circle | Ethereum (native) | Lowest — issued by Circle |
| USDC | Circle | Arbitrum (native) | Low — Circle mints natively |
| USDC.e | Wormhole bridge | Various L2s | Bridge risk — if Wormhole is hacked, USDC.e could depeg |
| USDbC | Avalanche bridge | Avalanche | Bridge risk |
Always prefer native assets when possible. Bridged tokens carry the additional risk of the bridge being compromised.
Major Wrapped Tokens
| Wrapped Token | Original Asset | Chain | TVL | Custodian |
|---|---|---|---|---|
| WETH | ETH | Ethereum + L2s | $5B+ | Smart contract (trustless) |
| WBTC | BTC | Ethereum | $8B+ | BitGo (centralized) |
| stETH | ETH | Ethereum | $25B+ | Lido protocol |
| wstETH | stETH | Ethereum + L2s | $5B+ | Lido protocol |
| tBTC | BTC | Ethereum | $100M+ | Distributed (trustless) |
Trustless vs Custodial Wrapping
| Type | How It Works | Examples | Risk |
|---|---|---|---|
| Trustless | Smart contract holds the asset, no intermediary | WETH, stETH, tBTC | Smart contract risk only |
| Custodial | A company holds the asset and issues tokens | WBTC (BitGo) | Custodian risk + smart contract |
WETH is trustless — the WETH contract simply holds your ETH and you can unwrap it anytime. WBTC requires trusting BitGo.
Risks of Wrapped Tokens
- Custodian risk: For centrally wrapped tokens (WBTC), the custodian could be hacked, go bankrupt, or freeze withdrawals.
- Bridge risk: For bridged tokens (USDC.e), the bridge could be exploited (as happened with Wormhole’s $326M hack).
- Depeg risk: If the wrapped token loses its 1:1 peg (due to a hack or loss of confidence), your wrapped tokens become worth less than the original.
- Smart contract risk: The wrapping contract itself could be exploited.
Frequently Asked Questions
Q: Should I wrap my ETH? A: Yes, if you want to use it in DeFi (Uniswap, Aave, etc.). WETH is always 1:1 with ETH and wrapping is instant and reversible. There’s no reason to hold ETH instead of WETH for DeFi purposes.
Q: Is WBTC safe? A: It carries BitGo custodian risk. If BitGo is compromised, WBTC could lose its peg. For lower-risk Bitcoin exposure on Ethereum, consider tBTC (trustless) or holding BTC natively on Bitcoin.
Q: What’s the difference between stETH and wstETH? A: stETH’s balance increases daily (rebase) as staking rewards accrue. wstETH’s balance is fixed — its value increases relative to stETH over time. wstETH is used in DeFi because a fixed-balance token is easier for protocols to handle.