Wrapped token (WBTC, WETH)

A wrapped token is a token on one blockchain that represents an asset from another blockchain, or a different format of the same asset, backed one-to-one. Wrapped bitcoin (WBTC), for example, is an ERC-20 token on Ethereum that is backed by bitcoin held by a custodian, allowing bitcoin to be used in Ethereum DeFi apps.

Wrapped ether (WETH) is a special case: it converts ETH itself into the ERC-20 token format so it can be traded and used in smart contracts like any other token. Wrapping and unwrapping WETH is handled entirely by a smart contract.

The main risk of wrapped assets is the backing. For custodial wrappers like WBTC, you are trusting the custodian to hold the real coins and honour redemptions; for bridge-based wrappers, you are trusting the bridge's code and operators. Several large hacks have drained the reserves behind wrapped tokens, leaving them unbacked. Alternatives such as cbBTC and tBTC use different custody models.