What Is Wrapped Crypto and How Does It Work?

Wrapped crypto represents a tokenized version of another cryptocurrency, designed to bridge separate blockchain networks. It allows assets native to one blockchain to be utilized on a different one, enabling a more interconnected financial landscape.

Understanding Wrapped Crypto

The process of “wrapping” crypto involves taking an asset from its native blockchain and locking it in a secure digital vault or smart contract. For instance, to wrap Bitcoin (BTC) for use on the Ethereum network, the original BTC is held in reserve by a custodian. An equivalent amount of a wrapped token, such as Wrapped Bitcoin (wBTC), is then minted on the target blockchain, mirroring the original asset’s value on a 1:1 basis.

Custodians, which can be centralized entities, multi-signature wallets, or decentralized smart contracts, hold the original asset. For every wrapped token created, an equal amount of the original asset is held as collateral. This allows the wrapped token to be transacted on the new network while the original token remains locked.

The reverse process, “unwrapping” or “burning,” involves sending the wrapped token back to the custodian. The custodian then destroys the wrapped token and releases the original asset back to the user. This ensures the supply of wrapped tokens always corresponds to the underlying assets, maintaining the peg.

Key Advantages of Wrapped Crypto

Wrapped crypto enhances interoperability across different blockchain networks, allowing assets to move and be used seamlessly between incompatible systems. This bridges isolated blockchains, fostering a more connected digital economy. For example, an asset from one chain can participate in decentralized finance (DeFi) applications on another, expanding its utility.

Wrapped tokens increase liquidity across platforms. By enabling assets to be used across multiple networks, wrapped crypto increases the total capital available within the DeFi market, leading to more trading activity and financial opportunities. This expanded utility allows asset holders to engage in activities like lending, borrowing, or providing liquidity on chains that do not natively support their original assets.

Wrapped tokens also offer transaction efficiency. Since they operate on the target blockchain’s protocol, transactions involving wrapped tokens benefit from faster processing times or lower fees. This improves the user experience by reducing delays and costs when engaging with decentralized applications.

Common Wrapped Tokens and Their Use Cases

Wrapped Bitcoin (wBTC) is a prominent example, allowing Bitcoin’s value to be used on the Ethereum blockchain. It is backed 1:1 by actual Bitcoin held in reserve, enabling Bitcoin holders to access the extensive Ethereum-based DeFi ecosystem. This means Bitcoin owners can participate in lending, borrowing, and yield farming on Ethereum platforms without selling their original Bitcoin.

Wrapped Ethereum (wETH) is another widely used token, addressing a compatibility need within the Ethereum network. While Ether (ETH) is the native cryptocurrency of Ethereum, it does not conform to the ERC-20 token standard, widely adopted by decentralized applications and smart contracts. Wrapping ETH into wETH makes it ERC-20 compliant, allowing seamless integration into DeFi protocols, decentralized exchanges, and NFT marketplaces.

Beyond wBTC and wETH, other cryptocurrencies have wrapped versions to extend their utility across different blockchains. These tokens facilitate cross-chain value transfer and enable the creation of new financial instruments within the broader crypto landscape. The ability to use assets from one chain on another expands investment opportunities and fosters a more integrated digital asset market.

Obtaining and Using Wrapped Crypto

Users can acquire wrapped crypto tokens through several avenues, including decentralized exchanges (DEXs), centralized exchanges (CEXs), or specialized wrapping services and protocols. On a CEX, users might purchase wrapped tokens directly, similar to buying any other cryptocurrency. For a DEX, it often involves swapping an existing asset for its wrapped version.

Dedicated wrapping platforms or protocols allow users to directly convert their original assets into wrapped tokens. This process typically involves sending the original asset to a designated address, where it is locked, and the corresponding wrapped token is then minted and sent to the user’s compatible wallet. For instance, to get wBTC, a user might send Bitcoin to a custodian or interact with a decentralized protocol like Keep Network.

Once obtained, wrapped crypto can be utilized across a variety of decentralized applications and platforms on the target blockchain. Common uses include providing liquidity to decentralized exchanges, using them as collateral for loans in lending protocols, or participating in yield farming strategies to earn rewards. A compatible cryptocurrency wallet that supports the target blockchain’s token standard, such as ERC-20 for wrapped tokens on Ethereum, is necessary to store and interact with these assets.