What is a wrapped token in crypto?

A wrapped token is a token that represents another crypto asset one for one. The original asset is locked up somewhere, and an equal amount of the wrapped version is created so it can be used where the original cannot. Unwrapping reverses the process, destroying the wrapped token and releasing the original.

What does a wrapped token represent?

A wrapped token is a claim on the underlying asset. It is meant to track that asset's value exactly, because anyone holding it should be able to swap it back. The wrapped version usually follows a different technical standard, such as Ethereum's ERC-20, so apps built for that standard can handle it.

The best known example is WETH, wrapped ether. ethereum.org explains that native ETH predates the ERC-20 standard, so wrapping it lets apps treat ETH like any other token. Solana has a similar idea. Its docs describe wrapped SOL as SOL held in a token account tied to a special "native mint," which lets SOL be used through the same instructions as other tokens.

What are the different types of wrapped tokens?

Wrapped tokens differ mainly in who or what holds the original.

• Contract-backed. The asset sits in a public smart contract on the same chain. Canonical WETH works this way, and ethereum.org describes its contract as simple, widely tested and formally verified.
• Custodian-backed. A company holds the original asset, often on a different blockchain, and mints the token. Wrapped bitcoin relies on a custodian holding real bitcoin.
• Bridge-backed. A crypto bridge locks the asset on its home chain and mints a wrapped copy on another. Wormhole's docs describe this lock and mint flow, where its guardian network verifies the deposit before wrapped tokens are minted on the destination chain, backed one for one by the locked assets.

What are the risks of wrapped tokens?

The main risk is the backing. If the contract, custodian or bridge holding the originals fails or is drained, the wrapped tokens may no longer be redeemable at full value.

The Multichain bridge shows how this can happen. In July 2023, The Block reported that about $126 million in assets flowed out of Multichain's bridge deployments on Fantom and Dogechain. Multichain said its service had stopped and bridge transactions were stuck. The Fantom Foundation noted that its native coin was unaffected, which suggested the damage fell mainly on wrapped assets issued through the bridge.

There is also confusion risk. ethereum.org warns that many WETH-like tokens exist on other networks and inside individual apps, and that they may behave differently or carry different security properties. Two tokens with the same name on different chains can have entirely different backers. Checking the token contract address shows which version you actually hold.

Finally, wrapping does not replace the native coin for fees. On Ethereum, gas must still be paid in ETH, not WETH.