Wrapped tokens: what they are and why they exist
A wrapped token is a crypto token pegged to an asset on another chain. A bridge or custodian locks the original and mints the wrapper on that network.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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- Wrapping lets an asset reach DeFi apps on another chain.
- Redeeming reverses the process through the same issuer or bridge.
- Bridge hacks, contract bugs, and depegs are the main risks.
Wrapping gives an asset a form that apps on the target chain accept, mostly for DeFi trading and lending. You are not holding the coin, only a token that stands in for it and depends on whoever issued it.
Why do wrapped tokens exist?
A blockchain usually cannot hold or trade an asset that lives on another chain, because apps there accept only tokens issued on that network. Wrapping creates a version those apps accept.
How does wrapping work?
A bridge, a custodian, or a smart contract takes control of the original asset and issues the wrapper. Redeeming runs the process backward through the same party, which destroys the wrapper and releases the original.
What risks do wrapped tokens have?
Wrapping puts extra parties and extra code between you and the asset. A bug in a smart contract can lock or drain funds. Bridges have been hacked, and a custodian can fail or freeze withdrawals. A wrapper can also depeg, which means its price falls below the value of the asset it tracks.
How is it different from the original?
The original coin is native to its own blockchain and follows its rules. A wrapped token is a separate token with its own contract address, issued on the network where it works. You usually hold a claim on the issuer, a custodian, or the bridge, not the coin.
Frequently asked questions
Often you can, if the issuer or bridge supports redemption. Some wrappers are made only for trading, and swapping one back on a market depends on liquidity.
No. The original coin keeps working on its own chain, and a wrapper that fails does not damage the coin itself.
The IRS treats crypto as property, so trading one crypto for another, a wrapper included, is usually taxable. Wrapping alone is not clearly settled.
Not always. A wrapper trades in its own market, so its price can drift and a depeg may take time to close.
