A wrapped token is a representation of an asset from one blockchain on a different blockchain. Wrapped Bitcoin (WBTC) is an ERC-20 token on Ethereum that is backed 1:1 by actual BTC held in custody. It lets you use Bitcoin's value in Ethereum DeFi (lending, trading, liquidity) without actually being on the Bitcoin network.
What Is a Wrapped Token?
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The short version
A wrapped token is like a gift card version of a foreign currency. You cannot spend Japanese yen directly at an American store. But if someone holds your yen and gives you a dollar-denominated gift card for the same value, you can shop locally. The gift card (wrapped token) represents value that exists somewhere else (the original chain), and you can always convert it back.
How It Works
Wrapping process (WBTC example): (1) You send 1 BTC to a custodian (BitGo for WBTC). (2) The custodian locks the BTC in a publicly verifiable address. (3) They mint 1 WBTC (ERC-20 token) to your Ethereum address. Unwrapping: reverse the process. Burn 1 WBTC, receive 1 BTC. The custodial model means you trust BitGo to hold the BTC. Decentralized alternatives exist: tBTC uses a decentralized network of operators with overcollateralized bonds (no single custodian). Other wrapped tokens: WETH (wrapping native ETH into ERC-20 for DeFi compatibility), wstETH (wrapping stETH for protocols that need a non-rebasing token), and various bridge-wrapped tokens that represent cross-chain assets.
Using WBTC as collateral on Aave
You hold 2 BTC and want to borrow stablecoins without selling your Bitcoin. You send 2 BTC to WBTC merchant (BitGo custodian). You receive 2 WBTC on Ethereum. You deposit 2 WBTC into Aave as collateral ($120,000 at $60K/BTC). You borrow 60,000 USDC (50% LTV, conservative). You now have $60K in stablecoins to use however you want, while maintaining BTC price exposure through your WBTC collateral. If BTC goes up, your collateral increases in value. You repay the 60K USDC + interest eventually, withdraw your 2 WBTC, and unwrap back to BTC on the Bitcoin network.
What People Get Wrong
WBTC is the same as holding real Bitcoin
WBTC has custodial risk (BitGo holds the actual BTC) and smart contract risk (the ERC-20 contract). Real BTC in your own wallet has neither. WBTC gives you Bitcoin exposure in Ethereum DeFi, but it adds trust assumptions that native BTC does not have.
Wrapped tokens can be created by anyone
Anyone can create a wrapper contract, but trust comes from the backing mechanism. Official WBTC has verified reserves and a DAO governance structure. Random "wrapped" tokens with no verifiable backing are potentially worthless or scams. Verify the backing before using any wrapped asset.
WETH and ETH are different assets
WETH is simply ETH in ERC-20 format. The value is identical (1 WETH = 1 ETH always, with instant wrapping/unwrapping via a simple contract). WETH exists because native ETH does not conform to the ERC-20 standard, which some DeFi protocols require for uniform handling. Wrapping/unwrapping is free (just gas).
Keep Reading
Sources & Further Reading
- WBTC Network Dashboard
Official WBTC site with proof of reserves, merchant list, and custody details
Questions People Also Ask
- How do I verify WBTC reserves?
- The WBTC DAO publishes proof of reserves at wbtc.network/dashboard/audit. You can verify: the Bitcoin custodian address holds at least as many BTC as WBTC tokens exist. The on-chain BTC balance is publicly verifiable by anyone.
- Is WBTC the only way to use Bitcoin in DeFi?
- No. Alternatives include: tBTC (decentralized, overcollateralized), renBTC (deprecated), sBTC (Stacks/Bitcoin L2), and native Bitcoin DeFi on Lightning or sidechains. WBTC is the most liquid ERC-20 Bitcoin representation, but not the only option.
- Can wrapped tokens lose their peg?
- If the custodian is compromised or cannot prove reserves, the wrapped token can trade below the value of the underlying. This is rare for established wrappers like WBTC but has occurred with smaller bridge-wrapped tokens when bridges were exploited.