Wrapped Tokens

Wrapped tokens are cryptocurrencies that are pegged to the value of another cryptocurrency. The wrapped version is issued on a host blockchain, then the original asset is then locked in a secure digital sandbox. Wrapped tokens usually represent a cryptocurrency that doesn’t natively live on the network it’s issued on.

An example of a wrapped token is Wrapped Bitcoin (WBTC). This is a tokenised version of Bitcoin on Ethereum. It is an ERC-20 token that holds a one-to-one pegging of Bitcoin, allowing users to use BTC on the Ethereum blockchain. As of Feb 1, 2022, this token has a market capitalisation of over $10 billion and is secured by BitGo. It holds 81% of the market share for wrapped tokens, with the next largest being renBTC with a market value of roughly $700 million. WBTC is highly useful as it allows users and BTC investors to embed their asset into decentralised finance applications and protocols on the Ethereum blockchain. This allows investors to even turn BTC into a yield-earning asset, one that can generate yield returns the same as investors can earn yield through liquidity pools on Uniswap or Yearn Finance. 

Another example is Wrapped Ether (WETH). The main purpose of WETH is to trade synthetic ether on the Ethereum blockchain. Here, WETH holders convert their ETH into an ERC-20 token, which can then be used in Ethereum’s decentralised finance applications and protocols. Essentially, the WETH converted to an ERC-20 token follows a specific set of rules and protocols to ensure it is able to be used with Ethereum’s services and platforms. With WETH, users can pledge their funds directly to deFi protocols and trade directly with other altcoins based on Ethereum.