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Wrapped tokens are digital assets that represent real-world or other blockchain-based assets on a different blockchain, typically Ethereum. They are essentially tokenized versions of these assets, allowing them to be used within the ecosystem of the host blockchain. This is achieved by 'wrapping' the asset, creating a pegged token that holds a value equivalent to the underlying asset.

Wrapped tokens work by locking the original asset in a smart contract and minting an equivalent amount of the wrapped token on the target blockchain. This process ensures that the wrapped token maintains a 1:1 peg with the underlying asset, providing users with the ability to trade, stake, or use these tokens in various decentralized finance (DeFi) applications while benefiting from the liquidity and versatility of the host blockchain.

Common examples of wrapped tokens include Wrapped Bitcoin (WBTC), which brings Bitcoin’s value and liquidity to Ethereum, and Wrapped Ether (WETH), which allows Ether to be used in ERC-20 compatible applications. These tokens play a crucial role in enhancing interoperability and expanding the utility of assets across different blockchain networks, enabling users to leverage their holdings in a broader array of financial activities.