What are Wrapped Tokens?
Your guide to cross-chain crypto assets.
Bitcoin doesn't run on Ethereum. Ethereum doesn't run on Solana. Every blockchain is, by design, an island. That's fine for security. But it creates a real problem when you want to lend your BTC on an Ethereum money market, or trade ETH on a Solana exchange. Wrapped tokens are the solution. They're among the most important building blocks in decentralized finance (DeFi) today, and the category they represent moves tens of billions of dollars across chains at any given time.
This guide explains what wrapped tokens are, how they work, why they exist, where they're used, and what the real risks look like. We'll also cover the biggest shake-up in the wrapped Bitcoin world in years: the WBTC / BitGo / Justin Sun controversy of 2024 and the new wave of competitors that followed.
What is a Wrapped Token?
A wrapped token is a token on one blockchain that represents an asset on a different blockchain. It is pegged 1:1 to the value of the original asset. Think of it like a redeemable voucher: the real token gets locked away in a vault, and you receive a voucher (the wrapped token) that you can use anywhere on the new chain. When you want your original asset back, you hand in the voucher and get it redeemed.
The most famous example is Wrapped Bitcoin (WBTC), launched on Ethereum in January 2019. Before WBTC existed, Bitcoin holders who wanted to participate in Ethereum's DeFi apps had to sell their BTC first.
WBTC solved that: lock your Bitcoin with a custodian, receive an equal amount of WBTC on Ethereum, and now your Bitcoin value can flow through Aave, Uniswap, and hundreds of other protocols that use Ethereum.
In plain terms A wrapped token is like converting cash into casino chips. The chips aren't real money, but inside the casino, they work like money. When you leave, you cash out and get your original currency back. The wrapped token is your 'chip' on another blockchain. |
How Does Wrapping Work?
Wrapping always involves two sides: locking an asset on one chain and minting a new token on another. Here's the standard flow:
- You submit a request to wrap your token through a bridge or protocol.
- Your original crypto (e.g., BTC) is sent to a custody address or smart contract.
- A 'lock contract' locks the original asset so it cannot be moved.
- A 'mint contract' creates an equivalent amount of the wrapped token on the destination chain.
- The wrapped token arrives in your wallet on the new chain.
Unwrapping works in reverse: the wrapped token is burned on the second chain, and the original asset is released from the lock contract and sent back to you. Both wrapping and unwrapping charge a fee.
This whole process runs on a cross-chain bridge that handles communication between the two chains. The bridge's security is one of the most important factors in how safe a wrapped token is to hold.
For more on how bridges work, see our full guide: Cross-Chain Bridges: An Overview.
Two Models: Custodial vs. Decentralized
Not all wrapped tokens work the same way. There are two main approaches:
Custodial wrapping
A single company (called a custodian) holds the original asset on your behalf. BitGo does this for WBTC. Coinbase does it for cbBTC. Binance does it for BTCB. You trust that company to hold the reserves, process redemptions honestly, and not get hacked.
Custodial wrappers tend to have the deepest liquidity and widest protocol support, because they're backed by established institutions. The trade-off is that you're putting a lot of trust in one entity.
Decentralised wrapping
Instead of a single company, a network of validators or smart contracts collectively holds the reserves. tBTC (from Threshold Network) and LBTC (from Lombard Finance) use variants of this model. No single entity controls the funds. Trust is distributed.
Decentralized wrappers are more aligned with crypto's goal of self-custody and permissionless access. They often have lower liquidity than their custodial counterparts, and smart contract risk still applies.
Why Do Wrapped Tokens Exist?
Wrapped tokens solve the interoperability problem by allowing value to move across chains while the original asset remains safely locked. Here are the main use cases:
- DeFi access for non-native assets. WBTC and cbBTC let Bitcoin holders participate in Ethereum lending markets (Aave, Morpho, Compound) without ever selling their BTC.
- Trading on DEXs. Decentralized exchanges typically support only tokens native to their chains. Wrapped versions make other assets tradeable on those platforms.
- Yield farming and liquidity provision. Wrapped tokens fit into liquidity pools just like native tokens. See our guide on yield farming in DeFi for more.
- Collateral for stablecoins. Protocols like Sky (formerly MakerDAO) and Aave accept wrapped tokens as collateral, letting users borrow stablecoins without selling their underlying crypto.
- Speed and cost. Wrapping a Bitcoin onto a fast, cheap Layer 2 like Base can significantly cut transaction fees and confirmation times compared to moving value on Bitcoin's native network.
The Wrapped Bitcoin Landscape in 2026
Bitcoin is the most-wrapped asset in crypto, and the competitive landscape shifted dramatically in 2024-2025. Here is where things stand:
WBTC (Wrapped Bitcoin)
The original, launched in 2019 and custodied by BitGo. WBTC dominated the wrapped BTC market for years. In August 2024, BitGo announced a partnership with Hong Kong-based BiT Global, a firm connected to Tron founder Justin Sun, to share custody of WBTC's reserves.
The DeFi community's reaction was immediate and harsh. MakerDAO's risk advisors declared Sun's involvement an 'unacceptable level of risk.' Coinbase delisted WBTC in December 2024. BiT Global sued Coinbase for antitrust violations; the lawsuit was dismissed in June 2025. WBTC still exists with substantial TVL, but its dominance has been broken.
cbBTC (Coinbase Wrapped BTC)
Launched by Coinbase in September 2024, right as the WBTC controversy was peaking. cbBTC is fully custodied by Coinbase and works on Ethereum, Base, Solana, and Arbitrum. Adoption has been rapid; it became one of the leading BTC collateral assets on Aave within its first year. It is unambiguously centralized, but Coinbase's regulatory standing and institutional credibility give many users comfort.
LBTC (Lombard Staked Bitcoin)
LBTC is a Bitcoin-liquid-staking token. The underlying BTC is staked through the Babylon protocol to earn yield, and LBTC is the liquid, transferable token that represents that staked position.
Lombard uses a decentralized Security Consortium (Galaxy, Wintermute, OKX, and others) rather than a single custodian. It hit $1 billion in TVL in just 92 days and is available across 12 chains.
tBTC (Threshold Bitcoin)
Threshold Network's fully decentralized wrapped Bitcoin. Mint-and-burn operations are delegated to a distributed network of validators secured by Threshold's native T token. Lower liquidity than the others, but the highest degree of trust minimization.
Other Wrapped Tokens
Wrapped Ether (WETH)
ETH needs to be wrapped to work with most DeFi protocols because it predates the ERC-20 standard it helped popularise, so it isn't technically ERC-20-compliant. WETH is a 1:1 wrapped version of ETH that is ERC-20 compatible, making it usable in nearly every Ethereum DeFi protocol, NFT marketplace, and DEX. Most apps handle the wrapping automatically, so many users never even notice it.
Wrapped SOL (wSOL)
Native Solana (SOL) needs to be wrapped into the SPL token format for most Solana-based DeFi protocols. Like WETH, this is usually handled invisibly by protocol front-ends.
BNB Chain Wrapped Assets
Binance's cross-chain bridge supports wrapped versions of BTC, ETH, XRP, USDT, and other major assets on BNB Chain, enabling users to access BNB Chain DeFi without leaving their primary holdings.
Avalanche Bridge Assets
Avalanche's official bridge to Ethereum supports wrapped USDC, USDT, and other ERC-20 tokens, enabling them to be used in Avalanche's DeFi protocols.
The Risks of Wrapped Tokens
Wrapped tokens inherit all the risks of the original asset and then add several new ones on top. Anyone holding a meaningful amount should understand what those are. For a deeper dive into DeFi security, see our article: How DeFi Hacks Happen.
1. Custodian Risk
With custodial wrappers like WBTC and cbBTC, you're trusting a company to actually hold the reserves. If that company is hacked, collapses, or mismanages funds, the wrapped token becomes worthless. The WBTC-BiT Global situation in 2024 showed how quickly community confidence can erode when custody arrangements change.
2. Bridge and Smart Contract Risk
Cross-chain bridges have been the most-exploited category of infrastructure in all of crypto. Since 2021, over $2.5 billion has been drained from bridge hacks: Ronin ($625M), Wormhole ($325M), and Nomad ($190M) are the worst. If the bridge behind a wrapped token is compromised, the token's backing can be drained.
3. Depeg Risk
Wrapped tokens should trade 1:1 with their underlying asset. But that peg is held together by arbitrageurs who can mint and redeem to capture price differences. During a panic, a custodian controversy, a bridge hack, or a liquidity crunch, the peg can break. WBTC traded at a discount during the 2024 BiT Global fallout.
4. Centralization Risk
The more popular a custodial wrapper becomes, the more it concentrates large sums of Bitcoin or Ether in the hands of a single company. This creates both a large hack target and a regulatory risk. It also goes against the self-custody ethos of crypto.
Practical rule Wrapped tokens are tools for specific activities—lending, trading, or farming yield. When that job is done, unwrap. The longer your original asset sits locked in a third-party contract, the greater the risk you incur for no benefit. |
How to Use Wrapped Tokens Safely
If wrapped tokens are part of your DeFi strategy, a few practices help reduce risk meaningfully:
- Check for proof-of-reserves. Reputable wrapped tokens publish regular attestations confirming that the reserves back the circulating supply. Chainlink Proof of Reserves is one standard. If you can't find this, proceed with extra caution.
- Use well-established wrappers. WBTC, cbBTC, and WETH have deep liquidity and long track records. Newer tokens with aggressive yields often signal higher risk.
- Unwrap when done. Holding wrapped tokens idle exposes you to custodian and bridge risk without any corresponding benefit. If you're not actively using the wrapped position, unwind it.
- Spread exposure. Don't concentrate everything in a single wrapped token. If one custodian fails, you don't want to lose everything in one shot.
Frequently Asked Questions
Are wrapped tokens the same as the original asset?Economically, yes they're designed to hold the same value 1:1. But technically, they're different: a separate token on a separate chain, dependent on custody and bridge infrastructure, the original asset doesn't need. That infrastructure is where the extra risk comes from. |
Do wrapped tokens earn yield?Standard wrapped tokens (WBTC, WETH) don't earn yield by themselves; they're just representations of the original asset. But you can put them to work in DeFi protocols to earn interest, provide liquidity, and farm rewards. Liquid staking wrappers like LBTC go further: the underlying BTC is actively staked, and the staking yield accrues to the token holder. |
What happens if the custodian of a wrapped token fails?The token's peg breaks. If the custodian can't honor redemptions, the wrapped token becomes a claim against an entity that cannot pay. Holders lose the difference between the price at which the wrapped token trades and the value of the original asset they believed they held. |
Is WBTC still safe to hold?WBTC's Bitcoin reserves remain secured in a multisignature wallet, and BitGo continues to operate as a regulated custodian. The 2024 controversy was about trust and governance, not a direct hack of the reserves. |
Do wrapped tokens work with a hardware wallet?Yes. Wrapped tokens are standard tokens on their destination chain (ERC-20 on Ethereum, SPL on Solana) and are fully supported by hardware wallets that support those chains. Holding wrapped tokens in a hardware wallet when they're not actively deployed in DeFi is good practice. |
What is the difference between WBTC and cbBTC?Both represent Bitcoin on Ethereum, but they're issued by different custodians. WBTC is issued by BitGo in partnership with BiT Global. cbBTC is issued by Coinbase. cbBTC also works on Base (Coinbase's Layer 2) and Solana. The key difference is counterparty: you're trusting BitGo vs. Coinbase to hold the reserves. |
Can wrapped tokens lose their 1:1 peg?Yes. The peg is maintained by arbitrageurs who mint and redeem to profit from price differences. In a market panic or custodian crisis, liquidity can dry up, redemptions can halt, and the wrapped token can trade below the value of its underlying asset. This is called 'depegging' and it has happened to WBTC during moments of uncertainty. |
What is a cross-chain bridge and why does it matter for wrapped tokens?A cross-chain bridge is the infrastructure that moves information (and assets) between blockchains. Most wrapped tokens depend on a bridge to verify that your original asset was locked before minting the wrapped version. Bridge security is critical: the biggest crypto hacks in history have targeted bridges. If the bridge fails, the wrapped token can lose its backing. |
