Wrapped tokens like Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH) dominate the crypto landscape, enabling cross-chain functionality. This guide explores their purpose, benefits, and the top wrapped tokens reshaping decentralized finance (DeFi).
What Are Wrapped Tokens?
Wrapped tokens are cryptocurrencies pegged to the value of another asset but "wrapped" to operate on incompatible blockchains.
For example, WBTC mirrors Bitcoin’s value on the Ethereum blockchain, while WETH adapts Ether into an ERC-20 token for DeFi compatibility. These tokens solve interoperability challenges, allowing non-native assets to function within diverse ecosystems like Ethereum’s smart contracts.
Key Features:
- 1:1 Pegging: Each wrapped token is backed by an equivalent reserve of the original asset.
- ERC-20 Standard: Ensures compatibility with Ethereum-based dApps.
- Liquidity Boost: Enhances DeFi protocols by integrating traditionally isolated assets.
👉 Discover how wrapped tokens fuel DeFi innovation
Top 3 Wrapped Tokens
1. Wrapped Bitcoin (WBTC)
Market Leader: WBTC is the most adopted wrapped token, bridging Bitcoin with Ethereum’s DeFi ecosystem.
How WBTC Works:
- Users deposit BTC with custodians (e.g., CoinList).
- Custodians mint an equivalent amount of WBTC as ERC-20 tokens.
- WBTC holders access Ethereum dApps like Uniswap or Aave to earn yield.
WBTC vs. Bitcoin:
| Feature | Bitcoin (BTC) | Wrapped Bitcoin (WBTC) |
|--------------|--------------|-----------------------|
| Blockchain | Bitcoin | Ethereum (ERC-20) |
| Use Case | Store of value | DeFi integrations |
| Liquidity | Limited in DeFi | High in Ethereum dApps |
Buying WBTC:
- Select WBTC on platforms like Swapzone.
- Swap supported cryptocurrencies (e.g., ETH or USDT) for WBTC.
- Transfer WBTC to an ERC-20 compatible wallet (e.g., MetaMask).
2. Wrapped Ether (WETH)
Purpose: Converts native ETH into ERC-20 format for seamless trading on Ethereum-based platforms.
Why WETH?
- ETH isn’t ERC-20 compliant by default.
- WETH enables ETH to be traded like other tokens (e.g., for NFT purchases).
Conversion Process:
- Deposit ETH into a smart contract.
- Receive an equivalent amount of WETH.
3. Wrapped LUNA (WLUNA)
Ethereum Compatibility: Represents Terra’s LUNA on Ethereum, though values remain pegged.
LUNA vs. WLUNA:
- LUNA: Native to Terra blockchain.
- WLUNA: ERC-20 token for Ethereum DeFi.
Note: After Terra’s collapse, verify WLUNA’s utility and backing before trading.
How to Create a Wrapped Token
- User Request: A buyer contacts a merchant for wrapped tokens (e.g., WBTC).
- Custodian Role: The merchant coordinates with custodians to mint tokens after receiving the original asset.
- Minting: Custodians lock the asset (e.g., BTC) and issue wrapped tokens to the user’s wallet.
Unwrapping: Submit a burn request to redeem the original asset.
FAQs
Q: Are wrapped tokens safe?
A: Yes, if audited and backed by reputable custodians (e.g., WBTC’s multi-signature reserves).
Q: Can I stake wrapped tokens?
A: Absolutely! WBTC and WETH are widely used in Ethereum staking pools.
Q: Do wrapped tokens have fees?
A: Minting/unwrapping may incur minor fees, varying by custodian.
Q: Is WLUNA still viable post-Terra crash?
A: Check current projects utilizing WLUNA, as its utility depends on ecosystem recovery.
👉 Explore top DeFi platforms for wrapped tokens
Conclusion
Wrapped tokens unlock cross-chain liquidity and DeFi opportunities, with WBTC, WETH, and WLUNA leading the charge. By understanding their mechanics, users can leverage these assets to diversify strategies across blockchain networks.
Key Takeaways:
- Use WBTC to earn yield on Bitcoin via Ethereum.
- Convert ETH to WETH for ERC-20 compatibility.
- Research custodial backing before minting wrapped tokens.