Wrapped token

A wrapped token is a token pegged to the value of a cryptocurrency from a different blockchain and that always carries the same value as the underlying asset. Wrapped tokens allow crypto assets to be used on non-native blockchains. In essence, wrapping tokens is a solution to blockchain interoperability challenges.

For example, it is not possible to trade Bitcoin on a different blockchain such as Ethereum. One can think of it as trying to run a Windows application on an Android device: it won’t happen unless modifications are made to the application to allow it to run on Android. The modification of an Android app to run on iOS is similar to wrapping tokens.

By wrapping Bitcoin, users create a synthetic asset that they can trade on the Ethereum network. The wrapped token is an ERC-20 version of BTC. This opens the path for Bitcoin holders to leverage their assets in the decentralized finance space.

Token holders can wrap their tokens by sending them to merchants who mint wrapped tokens at a 1:1 ratio. The original token is sent to a custodian, and the users are issued a wrapped asset. When the user redeems the original asset, the synthetic asset is burned.