Wrapped Token
A wrapped token is a blockchain token designed to represent another asset, often on a network where the original asset does not natively exist.
✦ Key Insight
Wrapped tokens enable assets to participate in ecosystems and applications outside their original blockchain. They are widely used in DeFi, bridges, lending, and cross-chain trading.
✕ Common Misconceptions
Assuming the wrapped asset is identical to the original
Ignoring bridge or custodian risk
Buying an unofficial wrapped token
Forgetting redemption conditions
Confusing wrapped tokens with synthetic assets
Detailed Explanation
How It Works
A typical wrapped-token system locks or custodies the original asset and creates an equivalent token representation.
The wrapped token can later be redeemed for the original asset.
Different systems use different trust models, including:
Custodians
Smart contracts
Bridges
Decentralised validator sets
FAQs
Does a wrapped token equal the original asset?
It aims to track its value, but it adds additional structural risk.
Can wrapped tokens lose their peg?
Yes.
Why wrap an asset?
To use it on another blockchain or within applications that do not support the original asset directly.