What are Wrapped Tokens? A Complete Guide

Andrew McDowell

• 4 min read
What are Wrapped Tokens? A Complete Guide
  1. Introduction
  2. What Are Wrapped Tokens?
  3. How Do Wrapped Tokens Work?
  4. Wrapped Tokens vs Native Tokens
  5. What Is Wrapped Bitcoin (WBTC)?
  6. Wrapped Tokens on Ethereum
  7. How to Swap WBTC to ETH Using Trust Wallet
  8. How To Secure Wrapped Crypto Tokens
  9. Frequently Asked Questions
  10. Conclusion

Introduction

In the fast-paced world of cryptocurrency, innovation is key. One of the most significant developments in recent years is the rise of "wrapped tokens." These tokens act as digital "translators" by making it possible for different cryptocurrencies to operate on blockchains other than their own. This flexibility opens up new opportunities for cross-chain transactions, improved liquidity, and broader participation in decentralized finance (DeFi).

In this complete guide, you'll discover what wrapped tokens are, how they work, and why they matter. You'll also learn about specific examples such as Wrapped Bitcoin (WBTC) on Ethereum, how to swap between WBTC and ETH using Trust Wallet, and the best ways to keep your wrapped tokens safe.

What Are Wrapped Tokens?

Wrapped tokens are digital representations of cryptocurrencies on blockchains where they don't natively reside. They maintain a one-to-one value ratio with the original asset, effectively "wrapping" the original token into a version compatible with a different network.

Example: Wrapped Bitcoin (WBTC) is a token on Ethereum that represents Bitcoin. Even though you're using BTC on Ethereum, the overall value remains the same. This allows Bitcoin holders to participate in Ethereum-based decentralized applications without selling their BTC.

How Do Wrapped Tokens Work?

Minting (Creating Wrapped Tokens)

  1. You send your original cryptocurrency (e.g., Bitcoin) to a secure custodian.
  2. The custodian holds those coins in reserve.
  3. An equivalent amount of wrapped tokens is generated on the new blockchain.

This process is much like depositing a large bill at the bank and receiving smaller denominations in return. The total value remains consistent, just in a different form.

Custodian's Role

Custodians are trusted entities or smart contracts responsible for:

  • Holding the original tokens in a secure reserve
  • Ensuring the wrapped tokens maintain a 1:1 peg with the original
  • Managing both the creation ("minting") and redemption ("burning") of wrapped tokens

Burning (Redeeming Wrapped Tokens)

When you want to revert to the original cryptocurrency:

  1. You send the wrapped tokens back to the custodian.
  2. The custodian "burns" or destroys those wrapped tokens.
  3. The equivalent amount of the original tokens is released back to you.

Wrapped Tokens vs Native Tokens

Native Tokens

  • Each blockchain has its own native token, like Bitcoin (BTC) for the Bitcoin network or Ether (ETH) for the Ethereum network.
  • Native tokens are used to pay for transaction fees and power operations on their respective blockchains.

Wrapped Tokens

  • Wrapped tokens represent these native tokens on a different blockchain (e.g., Wrapped Bitcoin on Ethereum).
  • They adhere to the token standards of the new blockchain (for instance, ERC-20 on Ethereum), making them compatible with that ecosystem.

Why Are Wrapped Tokens Important?

  • Cross-Chain Transactions: Facilitate easier movement of value between different blockchains.
  • Increased Liquidity: Enable assets like BTC to participate in vibrant DeFi markets on Ethereum.
  • Faster & Cheaper Transactions: Some wrapped tokens benefit from the lower fees and faster speeds of their host chain.
  • Expanded DeFi Participation: Bitcoin holders can use Ethereum's DeFi apps without having to sell their BTC.

What Is Wrapped Bitcoin (WBTC)?

Wrapped Bitcoin (WBTC) is the most well-known example of a wrapped token:

  • It mirrors the price of Bitcoin while existing on the Ethereum network.
  • It gives BTC holders access to Ethereum's DeFi ecosystem, including lending, borrowing, and yield farming.
  • WBTC is managed by a decentralized autonomous organization (DAO) that includes multiple stakeholders in the DeFi sector.

Wrapped Tokens on Ethereum

Ethereum hosts one of the largest DeFi ecosystems, holding billions of dollars in total value. Notable wrapped tokens on Ethereum include:

  • WBTC: For Bitcoin holders wanting to use DeFi apps on Ethereum.
  • WETH (Wrapped Ether): Makes Ether compatible with ERC-20 standards.
  • Other Cross-Chain Assets: Various blockchains have created wrapped versions of their native tokens to tap into Ethereum's liquidity.

How to Swap WBTC to ETH Using Trust Wallet

Below is a quick overview of how you can swap your Wrapped Bitcoin (WBTC) into Ether (ETH) using Trust Wallet:

  1. Install Trust Wallet
    • Download Trust Wallet on your mobile device.
    • Set up a new wallet or import an existing one.
  2. Fund Your Wallet
    • Transfer some WBTC into your Trust Wallet address.
    • Make sure you also have some ETH to cover transaction fees (gas).
  3. Access the DApp Browser
    • Go to the 'Browser' or 'DApp' section in Trust Wallet (available on Android by default; for iOS, you may need to enable it manually).
    • Find a decentralized exchange (DEX) like Uniswap or PancakeSwap (if bridging tokens on certain networks).
  4. Select the Tokens
    • Choose WBTC as the token you want to trade.
    • Select ETH as the token you'd like to receive.
  5. Confirm the Swap
    • Review the transaction details, including gas fees.
    • Confirm the swap.
    • After confirmation, you'll see ETH in your wallet once the transaction is complete.

How To Secure Wrapped Crypto Tokens

Security is crucial for anyone participating in the crypto ecosystem, and wrapped tokens are no exception. Here are some best practices:

  • Hardware Wallets: Use devices like Ledger or Trezor to store private keys offline.
  • Enable 2FA: Activate two-factor authentication wherever possible.
  • Research Custodians: Only wrap your tokens using trusted custodians or audited smart contracts.
  • Stay Updated: Keep track of platform news and updates to avoid potential security breaches.

Frequently Asked Questions

Q: Are wrapped tokens safe?
A: Wrapped tokens are generally safe when using reputable custodians and audited smart contracts. However, centralized risks and smart contract vulnerabilities should be considered.

Q: What's the difference between WBTC and BTC?
A: WBTC is an ERC-20 token on Ethereum that represents Bitcoin, allowing BTC holders to use Ethereum's DeFi applications without selling their BTC.

Q: Can I lose money with wrapped tokens?
A: While wrapped tokens maintain a 1:1 peg, potential risks include smart contract bugs or failures by the custodian. Thorough research is essential.

Q: How do I start using wrapped tokens?
A: Choose a reliable custodial or decentralized protocol, set up a compatible wallet (like Trust Wallet or Metamask), and understand the process of minting and burning wrapped tokens.

Conclusion

Wrapped tokens have revolutionized the way different cryptocurrencies can interact by making cross-chain transactions and broader DeFi participation possible. Whether you want to diversify your portfolio, leverage faster transaction speeds, or simply explore new blockchain networks, wrapped tokens are at the center of this evolving landscape.

By understanding what wrapped tokens are, how they work, and why they matter, you'll be better prepared to navigate the ever-growing DeFi ecosystem. Just remember to prioritize security—use reputable custodians, store assets in secure wallets, and stay informed on potential risks.