Wrapped Token

A wrapped token is a token that represents another asset in a blockchain or token standard where the original asset cannot be used directly.

A common model involves locking or holding the original asset and issuing a corresponding amount of tokens on another network. When the wrapped tokens are redeemed, they are removed from circulation and the original asset can be released.

Why wrapped tokens are used

They allow an asset to be used in applications and protocols that cannot directly support its native form. A tokenized representation can, for example, make an asset available to liquidity pools, lending protocols, and other applications.

Backing and risks

The reliability of a wrapped token depends on the mechanism that links the representation to the original asset. Risks can arise from custodians, smart contracts, bridges, or other infrastructure components.

A wrapped token should therefore not automatically be assumed to be fully equivalent to the original asset. Its value and redemption mechanism depend on the specific implementation.