If you’re a cryptocurrency investor, you may have noticed that some currencies have a familiar name, but start with the letter "W", for wrapped.
And if you’re wondering what Wrapped Bitcoin (WBTC), Wrapped Ethereum (WETH), and other wrapped cryptocurrencies are, you’ve come to the right place.
This guide is covering what wrapped tokens are, how this innovative technology works, and the potential impact wrapped cryptocurrencies can have on your portfolio.
What Are Wrapped Tokens?
Wrapped tokens are a type of cryptocurrency that allows you to hold a non-native cryptocurrency asset on a different blockchain.
If that sounds like Greek to you, don’t worry; we’re going to break everything down here.
Cryptocurrency coins are the default currencies for each specific blockchain. For example, the default currency, or native currency, for the Bitcoin network is bitcoin. For the Ethereum network, it’s ether.
These coins are the currency used to transact on that particular blockchain. Whether you’d like to send ether to a friend or buy NFTs with Ethereum, you must pay with the ether coin.
But what if you want to use bitcoin for an Ethereum-related project? Or, what happens if you want to use your ether on the Solana blockchain to transact and save on gas fees?
That’s where wrapped tokens come into play. In cryptocurrencies, wrapped means the token represents an asset held in a smart contract on another blockchain. For example, Wrapped Bitcoin allows you to transact using bitcoin on the Ethereum blockchain.
With the right coding skills, nearly any cryptocurrency coin or token could be wrapped and bought or sold with another blockchain.
How Do Wrapped Tokens Work?
Wrapped tokens work using smart contracts. Smart contracts enable cryptocurrency tokens, cross-chain transfers, NFTs, and wrapped coins, among other uses.
Smart contracts are a code-driven tool that use “if this then that” functionality. Smart contracts are often compared to a digital vending machine, automating transfers and processes when specific conditions are met.
To actually create a wrapped token, you can use custodian like a decentralized autonomous organization (DAO) or centralized custodian. From there, the custodian holds your original cryptocurrency and mints an equivalent amount of the wrapped cryptocurrency on the other blockchain where you want to use your crypto.
This lets you transact with your new wrapped cryptocurrency on a different blockchain. If you want to get your original cryptocurrency back, you deposit your wrapped tokens with the custodian once more. This burns your wrapped cryptocurrency, upon which time the custodian releases the crypto you originally started with back to your wallet.
In short, it's this process of minting and burning crypto that lets you create wrapped cyptocurrencies for use on various blockchains.
For example, a custodian could create a smart contract to create wrapped ether on the Stellar blockchain, home to Stellar Lumens and much cheaper and faster transactions than you get with Ethereum.
From there, a smart contract would be deployed that creates newly wrapped ether when an ether coin is deposited. To withdraw the original ether, the wrapped ether would have to be re-deposited using the Stellar smart contract, which would allow the original smart contract to send the original ether to the correct wallet.
If that’s confusing, here’s a simpler way to think about it.
The smart contacts act as a virtual bank account with a virtual teller. When a coin is deposited, a wrapped token is created. To withdraw the coin, a wrapped token must be returned. The number of wrapped tokens should always equal the number of coins held in the smart contract.
Popular Wrapped Cryptocurrencies
Each wrapped currency has its own use cases, conveniences, and drawbacks. These are some of the biggest wrapped cryptocurrencies you can find, measured by market cap.
As of this writing, Wrapped Bitcoin is the 17th largest cryptocurrency by market capitalization, with 268,576 WBTC worth about $10.5 billion in circulation. Wrapped Tron is the 24th largest cryptocurrency, with 101.7 WTRX worth $6.1 billion in the markets.
Currently, nearly 70 different cryptocurrency assets have the word “wrapped” in their name. These are the top wrapped currencies by market cap:
- Wrapped Bitcoin (WBTC)
- Wrapped Tron (WTRX)
- Wrapped BNB (WBNB)
- Wrapped NCG (Nine Chronicles Gold)
- Wrapped NXM (WXNM)
You can also find Wrapped CryptoKitties, Wrapped AVAX, Wrapped LUNA Token, Wrapped Matic, Wrapped CRO, Wrapped Elrond, Wrapped Centrifguge, Wrapped Harmony, Wrapped KuCoin Token, Wrapped Solana, and others.
In addition to supporting currencies across blockchains, wrapped coins may be useful when using stablecoins. If you want to buy something from one chain and don’t want to swap currencies, wrapped stablecoins have huge potential.
What About Blockchain Bridges?
Buying wrapped tokens like WBTC outright is one way to get your hands on wrapped tokens. And, many popular cryptocurrency exchanges like Coinbase and Uphold let you buy WTBC and other wrapped tokens with funds from your bank account.
However, you can also use blockchain bridges to transfer your existing cryptocurrency to another blockchain.
Blockchain bridges increase interoperability between blockchains, meaning they help different blockchains exchange and use information.
For example, you can use the Binance Bridge to convert crypto to and from the Binance Chain and Binance Smart Chain wrapped tokens. Cross-chain bridges like AnySwap and RenBridge are also options. These bridges use the same mint-and-burn approach mentioned earlier.
By using blockchain bridges, you can pass between layers, like moving from layer one solutions like Ethereum to layer two solutions like Polygon (MATIC). You can also move your Bitcoin to other blockchains whereas this would normally be impossible.
Ultimately, blockchain bridges and wrapped cryptos help expand your decentralized finance (DeFi) opportunities. You can move your crypto cross-chain, making use of blockchains with lower transaction fees or more income opportunities, like staking or even various crypto savings accounts.
Pros & Cons Of Wrapped Cryptocurrencies
Now that you understand what wrapped tokens are and how they work, here are some of the advantages and disadvantages of this innovative technology that's important to understand.
Are Wrapped Cryptocurrencies Safe?
We now understand that there’s an underlying token locked away for every wrapped token in circulation. It’s very similar to the original gold standard for the United States dollar, where the government held a dollar’s worth of gold for every dollar in circulation.
The safety risks with wrapped currencies come from the quality of the smart contract and trustworthiness of the custodian handling the wrapping process. These are relatively low for the most significant currencies but may be problematic for smaller wrapped currency contracts.
First, the wrapped currency will always follow the value of the underlying currency if everything is set up correctly. But if you hold wrapped bitcoin and the value of bitcoin falls by half, the value of your wrapped bitcoin falls by half as well.
The second significant risk comes from centralization and custodian trust. If the custodian responsible for minting and burning wrapped and regular crypto is hacked or doesn't have the right protocols in place, investors can suffer losses.
For example, Wormhole, a leading blockchain bridge, suffered a hack in February 2022 of approximately $320 million worth of ether.
Finally, it’s also possible for a smart contract to be created as a scam. This is why it's important for crypto investors to do their due diligence and research before using any exchange or blockchain bridge.
The Bottom Line
Wrapped cryptocurrencies like WBTC and WETH are an incredible innovation for crypto. After all, wrapped tokens greatly increase interoperability between blockchains, letting you transact with different tokens on their non-native blockchains.
That said, you need to understand the technology behind wrapped tokens before investing in them. And, if you use a blockchain bridge to obtain wrapped tokens, make sure you do your due diligence so you use a reputable bridge.
If you're just looking to dabble in wrapped tokens, you can always turn to centralized exchanges as well like Binance and Coinbase to buy various wrapped cryptocurrencies.
Eric Rosenberg is a financial writer, speaker, and consultant based in Ventura, California. He holds an undergraduate finance degree from the University of Colorado and an MBA in finance from the University of Denver. After working as a bank manager and then nearly a decade in corporate finance and accounting, Eric left the corporate world for full-time online self-employment. His work has been featured in online publications including Business Insider, Nerdwallet, Investopedia, The Balance, HuffPo, Investor Junkie, and other fine financial blogs and publications. When away from the computer, he enjoys spending time with his wife and three children, traveling the world, and tinkering with technology. Connect with him and learn more at EricRosenberg.com.