Wrapped Token

What are wrapped tokens?

Wrapped tokens are assets that allow the value of a native asset from one blockchain to transfer to another blockchain. One of the best-known wrapped tokens is Wrapped Bitcoin (wBTC). WBTC is pegged 1:1 to the price of Bitcoin (BTC) so that one wBTC should always equal one BTC. But unlike BTC, wBTC is available as ERC-20 or TRC-20 tokens, which means it can be used and traded on the Ethereum and Tron blockchains.
In a way, wrapped tokens are similar to stablecoins such as USDT, which follow the price of the U.S. dollar. Just as one wBTC is pegged to the price of one BTC, one USDT is pegged to the price of $1.
What makes a wrapped token a wrapped token, though, is not just whether it is pegged 1:1 to the price of another asset. It's the technology behind it and the way in which its value is backed and maintained.

How do they work?

Wrapped tokens are created and destroyed by a process called 'minting' and 'burning'. To mint a wrapped token such as wBTC, the underlying asset, in this case BTC, is sent to a custodian who stores the BTC in a digital vault. Once the underlying BTC has been locked away, an equivalent amount of wBTC can be minted.
This process can also be understood as 'wrapping'. The underlying asset is 'wrapped up' in a digital vault using a smart contract, and a newly wrapped asset is minted for use on another blockchain.
To burn wBTC, the same process is followed, but in reverse. The wBTC is removed from circulation, and the equivalent amount of BTC is released from the digital vault and allowed back into circulation.
Just as minting wrapped tokens can be thought of as "wrapping” the underlying asset to create a token of equivalent value for use on another blockchain, burning wrapped tokens can be thought of as “unwrapping” the underlying asset.
This process of minting and burning, or wrapping and unwrapping, means that all wrapped tokens, from wBTC to renDOGE (a wrapped form of Dogecoin), are backed by an equivalent amount of their underlying currency. For every 100 renDOGE that has been minted, 100 DOGE are being held to back the value of the wrapped token.

Examples of wrapped tokens

  1. 1.
    WBTC - Project that wraps BTC for use on the Ethereum blockchain. It's operated by the wBTC DAO and started jointly by Kyber, Ren and BitGo
  2. 2.
    WETH - Wrapped ETH, or wETH, was created by a group of projects run by 0x labs and is an ERC-20 version of Ethereum that can be used as an asset on DeFi protocols
  3. 3.
    renDOGE - Wrapped version of Dogecoin that can be minted using the RenBridge on the RenVM protocol