What are Wrapped Tokens?

As the world of cryptocurrency grows, the need for seamless interaction between different blockchain networks is more important than ever. One innovation addressing this need is the use of wrapped tokens. What are wrapped tokens, and why are they significant? Wrapped tokens are digital assets that represent cryptocurrencies on non-native blockchains, enabling them to be used outside of their original networks.

Wrapped tokens facilitate cross-chain compatibility and improve liquidity, expanding the flexibility of decentralized finance (DeFi) ecosystems. In this article, we'll explore how wrapped tokens work and how they differ from native tokens.

What Are Wrapped Tokens?

Wrapped tokens are tokenized versions of cryptocurrencies that exist on blockchains different from their original network. Wrapped tokens enable digital assets to be used across various blockchain platforms, enhancing liquidity and expanding functionality.

For example, Wrapped Bitcoin (WBTC) is a token that represents Bitcoin (BTC) on the Ethereum blockchain. While it’s backed 1:1 by actual Bitcoin held in reserve by a custodian, WBTC can be used within the Ethereum ecosystem, enabling Bitcoin holders to access decentralized applications (dApps), decentralized exchanges (DEXs), and other Ethereum-based services.

The creation of wrapped tokens solves a major challenge in crypto: the lack of interoperability between different blockchain networks. Since most cryptocurrencies are native to their own blockchains, they can't directly interact with other chains. Wrapped tokens enable assets like Bitcoin to be “wrapped” and used in ecosystems where they previously weren’t compatible, unlocking a world of new possibilities for decentralized finance.

How Do Wrapped Tokens Work?

The process of creating and using wrapped tokens involves a few key steps, ensuring that the wrapped token remains tied to its native asset and retains value parity. Here's a breakdown of how wrapped tokens work:

1. Minting (Creating Wrapped Tokens)

The process begins with a user who holds the native token (e.g. Bitcoin) wishing to use it on a different blockchain (like Ethereum). The user sends the native token to a trusted custodian, which could be a smart contract, a group of custodians, or a centralized entity. This custodian holds the native token in reserve and mints an equivalent amount of wrapped tokens on the desired blockchain (e.g. Wrapped Bitcoin, or WBTC on Ethereum).

For example, if you deposit 1 BTC with a custodian, they will mint 1 WBTC for you on the Ethereum blockchain. The value of the wrapped token is always pegged 1:1 to the underlying asset, ensuring that 1 WBTC always equals 1 BTC.

2. Custodian's Role

The custodian is important for maintaining the value of the wrapped token. They hold the native asset in reserve, guaranteeing that, for every wrapped token in circulation, there’s an equivalent native token held securely. This backing ensures the wrapped token can be redeemed at any time for the original asset.

3. Burning (Redeeming Wrapped Tokens)

To redeem the native asset, users follow the reverse process. They send the wrapped token (e.g. WBTC) back to the custodian, who burns (destroys) the wrapped token and releases the equivalent amount of the native asset (BTC) back to the user. This process ensures that the supply of wrapped tokens always matches the underlying assets in reserve.

Benefits of Wrapped Tokens:

• Interoperability: Wrapped tokens help assets to move between different blockchain ecosystems, enabling users to leverage features and services that their native blockchain might not support.

• Liquidity: Moving assets like Bitcoin to other chains (e.g. Ethereum), wrapped tokens increase liquidity, especially in decentralized finance (DeFi), enabling more trading and borrowing opportunities.

• Efficiency: Wrapped tokens often operate on blockchains with faster transaction speeds and lower fees than the native chains, such as Bitcoin’s comparatively slower transaction time and higher fees.

Wrapped Tokens vs Native Tokens

Understanding the distinction between wrapped tokens and native tokens is crucial for navigating the world of decentralized finance (DeFi). While they are closely related, they serve different functions and exist in different environments. Let's explore the key differences between wrapped tokens and native tokens.

1. Native Tokens

Native tokens are the original cryptocurrencies that operate on their own blockchain. For example:

• Bitcoin (BTC) is the native token of the Bitcoin blockchain.

• Ether (ETH) is the native token of the Ethereum blockchain.

Native tokens are important to their respective networks, used for transaction fees, network security (e.g. mining or staking), and governance. These tokens, however, can only be used within their native ecosystems unless they are wrapped and transferred to another blockchain.

2. Wrapped Tokens

Wrapped tokens are representations of native tokens on a different blockchain. For example, Wrapped Bitcoin (WBTC) is Bitcoin wrapped and issued on the Ethereum blockchain. Even though WBTC represents Bitcoin, it follows Ethereum’s token standard (ERC-20), enabling it to interact with Ethereum-based applications and platforms like decentralized exchanges (DEXs), lending protocols, and liquidity pools.

Here are the key differences between wrapped and native tokens:

Why are Wrapped Tokens Important?

Wrapped tokens unlock new opportunities for using native assets like Bitcoin and Ether on non-native platforms. For example, WBTC enables Bitcoin holders to participate in the growing Ethereum DeFi space, without selling their Bitcoin. If users convert BTC to WBTC, they can lend, trade, or earn yield from Bitcoin in a decentralized manner on Ethereum-based platforms. Wrapped tokens act as a bridge between blockchains, enhancing liquidity and expanding the scope of what users can do with their assets.

How to Swap WBTC to ETH Using Trust Wallet

You can swap crypto, including wrapped tokens, using Trust Wallet, via our trusted partners. Here’s how:

• Select “Swap” from the Trust Wallet home screen.

• Ensure Ethereum is selected in the the “From” network field, and choose WBTC as your token

• Ensure Ethereum is selected in the “To” network field, and choose ETH as your token.

• Enter the amount of WBTC you would like to swap.

• Select “Continue” and complete the remaining steps.

Closing Thoughts

Wrapped tokens have revolutionized the way digital assets are used, providing an important bridge between otherwise isolated blockchain networks. Wrapped tokens enable interoperability and increase liquidity across ecosystems. Wrapped tokens like WBTC and WETH empower users to maximize the utility of their assets. Whether you want to use Bitcoin in Ethereum-based decentralized finance (DeFi) applications or trade cross-chain without selling your original assets, wrapped tokens offer a flexible, innovative solution.

As DeFi continues to grow, wrapped tokens are likely to play an even larger role in expanding the possibilities for decentralized trading, lending, and yield farming. Understanding how these tokens work and how to seamlessly swap them between assets opens up new opportunities in the evolving crypto space.

Disclaimer: Content is for informational purposes and not investment advice. Web3 and crypto come with risk. Please do your own research with respect to interacting with any Web3 applications or crypto assets. View our terms of service.

Join the Trust Wallet community on Telegram. Follow us on X (formerly Twitter), Instagram, Facebook, Reddit, Warpcast, and Tiktok

Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.