Wrapped Tokens on Ethereum: What They Are and Why They Matter

Wrapped tokens help move assets between blockchains. They let you use tokens like Bitcoin or ETH on networks that wouldn’t normally support them. This solves one of crypto’s biggest problems — blockchains that can’t talk to each other.

For example, Wrapped Bitcoin (WBTC) is Bitcoin you can use on Ethereum. It’s backed 1:1 by real BTC and works with Ethereum apps. WBTC alone has a market cap over $3.5 billion. All wrapped tokens combined are worth over $12 billion.

They’re useful — but not without risk. In 2022, $3.4 billion was stolen from the crypto space, and bridges (which handle wrapped token transfers) saw over $28 billion in volume the year before. That shows how important — and vulnerable — these tools are.

How Wrapped Tokens Work on Ethereum

Wrapped tokens act like bridges. They let you use coins from other blockchains — like Bitcoin — inside the Ethereum network. You don’t need to sell or swap your assets. You just wrap them.

What "Wrapped" Means

A wrapped token is a copy of a real token from another blockchain. It always matches the value of the original, usually 1:1. For example, WBTC is a token on Ethereum that equals 1 BTC.

Here’s how wrapping works:

• You send your real tokens (like BTC) to a custodian.

• They lock them up in a reserve.

• A smart contract then creates an equal number of wrapped tokens on Ethereum.

• When you want your original coins back, the wrapped tokens get burned, and the real coins are unlocked.

That’s how the value stays the same — every wrapped token is backed by the real thing.

Why Wrap Tokens?

Wrapping lets tokens do more. You can:

• Use non-Ethereum tokens (like BTC) on Ethereum

• Turn ETH into WETH so it can be used like other ERC-20 tokens

• Access DeFi tools like lending and yield farming

Wrapped tokens aren’t just for trading. They give older tokens new powers in modern protocols.

Why Wrapped Tokens Use ERC-20

Most Ethereum apps are built to work with ERC-20 tokens — it’s the standard for tokens on Ethereum. But ETH itself isn’t ERC-20. That’s why we have Wrapped ETH (WETH). It’s the same ETH, just in a format that DeFi apps can understand.

What ERC-20 Wrapping Allows

Wrapped tokens like WETH or WBTC can:

• Be used in lending or borrowing protocols

• Earn yield through farming or staking

• Join liquidity pools on decentralized exchanges

• Interact with smart contracts smoothly

This makes them useful for traders and DeFi users. You don’t need to switch networks or sell assets — wrapping gives your crypto more flexibility right inside Ethereum. Ethereum hosts over $25 billion in DeFi activity. Wrapped tokens make that money move more freely across apps and blockchains. They help unlock liquidity and make the ecosystem more connected.

Why Wrapped Tokens Use ERC-20

Most Ethereum apps are built to work with ERC-20 tokens — it’s the standard for tokens on Ethereum. But ETH itself isn’t ERC-20. That’s why we have Wrapped ETH (WETH). It’s the same ETH, just in a format that DeFi apps can understand.

What ERC-20 Wrapping Allows

Wrapped tokens like WETH or WBTC can:

• Be used in lending or borrowing protocols

• Earn yield through farming or staking

• Join liquidity pools on decentralized exchanges

• Interact with smart contracts smoothly

This makes them useful for traders and DeFi users. You don’t need to switch networks or sell assets — wrapping gives your crypto more flexibility right inside Ethereum. Ethereum hosts over $25 billion in DeFi activity. Wrapped tokens make that money move more freely across apps and blockchains. They help unlock liquidity and make the ecosystem more connected.

How Cross-Chain Wrapped Tokens Move

Wrapped tokens rely on different systems to move assets between blockchains. Each method has its pros and cons — mainly around security, cost, and how much control users keep.

Burn and Mint

This method is simple and efficient. Tokens are burned (destroyed) on one chain and minted (created) on another. How it works:

• You send tokens to a smart contract on the source chain.

• That contract burns them.

• A new set of tokens is minted on the destination chain.

No tokens are locked or stored anywhere — they’re just moved. This cuts the risk of hackers targeting big locked reserves. Circle’s USDC bridge uses this model.

Lock and Mint

This is the older, more common method. It’s used when the same token isn’t deployed on both chains. Here’s how:

• You send your coins to a custodian (can be a company, DAO, or smart contract).

• The custodian locks them.

• A matching amount of wrapped tokens is created on the other chain.

When you want your original coins back, the wrapped tokens get burned, and the custodian sends your assets back. This model depends on trust — someone needs to safely hold your original tokens. Projects like WBTC use this system, backed by a group of trusted DeFi members.

Lock and Unlock

This method skips wrapping. It uses liquidity pools to move real tokens between chains. What happens:

• You lock tokens in a pool on the source chain.

• The same amount gets unlocked on the destination chain.

• Messaging tools make sure it all stays in sync.

This is less efficient and more complex. But it’s useful when people want native tokens — not wrapped ones — on the other side.

What Standards Wrapped Tokens Use

Wrapped tokens follow specific rules, or “standards,” so they can work with apps and smart contracts on Ethereum. The two main ones are ERC-20 and ERC-777.

ERC-20: The Default Choice

Most wrapped tokens use ERC-20. It’s simple, reliable, and supported by nearly every DeFi platform. WBTC, WETH, and most others follow this standard because it works everywhere in the Ethereum world.

ERC-777: More Features, Less Common

ERC-777 adds extra tools:

• Contracts can react when they receive tokens (useful for automation)

• Token holders can let others act on their behalf

• Extra data can be sent with transfers

These features help in some cases, but for wrapped tokens, most projects stick to ERC-20. It’s easier to implement and has fewer risks.

Smart Contracts Handle Minting and Burning

Every time a wrapped token is created or destroyed, smart contracts do the work. They:

• Check that real assets are locked

• Mint new tokens when needed

• Burn tokens when users want to unlock their original coins

Good contracts also add security — things like multi-signature protection or time delays before large actions.

Custodial vs Trustless Bridges

Wrapped tokens can be managed in two ways:

• Custodial: A trusted company or group holds the original assets (like BitGo for WBTC)

• Trustless: No middleman — the system uses cryptography to verify actions (like RenVM with its “darknodes”)

Custodial models are simpler, but you have to trust someone. Trustless systems are more in line with how blockchains are meant to work — but they’re harder to build and maintain.

Wrapped Tokens in Real Use

Wrapped tokens aren’t just theory — they’re active across Ethereum. Each one works a little differently, depending on how it’s built.

WBTC — Wrapped Bitcoin

WBTC is the most popular wrapped token. It brings Bitcoin onto Ethereum. Every WBTC is backed 1:1 by real BTC, held by custodians. A DAO of 17 trusted members oversees who can mint or burn WBTC.

Here’s how it works:

• You go through KYC with a merchant.

• You send Bitcoin.

• The custodian locks your BTC and mints WBTC.

• You receive WBTC on Ethereum.

Over 270,000 BTC have been wrapped this way. It’s a clear example of a federated, custodial model with big adoption.

RenBTC — Trustless Wrapping with RenVM

RenBTC takes a different route. It’s decentralized. The RenVM protocol locks BTC using a network of nodes (called Darknodes). No single party controls your coins. Here’s how it works:

• You send BTC to an address created by RenVM.

• Nodes verify it.

• You get renBTC on Ethereum.

RenVM supports multiple blockchains, not just Ethereum. It’s designed to avoid central points of failure — though it’s more complex to operate.

WETH — Wrapped ETH

ETH itself isn’t ERC-20. That makes it harder to use in DeFi. WETH solves that. You send ETH to a smart contract, and it gives you WETH — 1:1. WETH lets ETH work like other tokens:

• You can trade it on DEXs

• Join liquidity pools

• Interact with smart contracts

Unlike WBTC or RenBTC, WETH doesn’t leave Ethereum. It just makes ETH compatible with its own apps.

Risks of Using Wrapped Tokens and Bridges

Wrapped tokens are useful — but they come with real risks. Bridges that move assets across chains are complex and often targeted by hackers.

Smart Contract Hacks

Bridges rely on code. If that code has bugs, it can be exploited. In 2022 alone, over $1.3 billion was stolen through bridge attacks. Common problems include:

• Fake deposits

• Weak validation checks

• Misconfigured settings

Big cases:

• Wormhole lost $320 million due to broken signature checks.

• Qubit was tricked by a fake deposit.

• Nomad had a config error that let anyone withdraw funds.

Even one bad update can lead to massive losses.

Custodian Risk

Most wrapped tokens depend on someone — a custodian — to hold the original asset. That’s a weak point. If the custodian fails or gets hacked, users lose trust (and money). The Ronin bridge hack is an example. Hackers took over validator nodes and stole $624 million. The system wasn’t decentralized enough to stop them.

Some projects use tools like Chainlink Proof of Reserve. These help verify that the locked funds actually exist and match the amount of wrapped tokens in use.

Regulation and Compliance

Authorities are watching bridges closely. One concern is chain hopping — moving assets between chains to hide illegal activity.

Regulators now demand that bridge operators follow KYC and AML rules. The EU's MiCA regulation may force bridges to act like financial service providers.

Decentralized systems like RenVM make compliance harder. There’s no central team to regulate. But regulators still expect some form of control — and that’s a growing challenge for fully decentralized bridges.

Conclusion

Wrapped tokens help blockchains work together. They let users move assets across networks without selling or swapping — just by wrapping.

We looked at how wrapped tokens are created (burn/mint, lock/mint, lock/unlock) and how they’re used in real projects like WBTC, RenBTC, and WETH. Each method has trade-offs: some offer more control, others more decentralization.

Security is the biggest challenge. Bridges are often targets, and billions have been stolen through bugs and bad setups. Trusting custodians also carries risk. And as regulations tighten, compliance is becoming just as important as code.

Still, wrapped tokens aren’t going away. They’re essential to building a multi-chain future. What matters now is doing it right — with better security, smarter design, and clear standards.