Technical Definition
Wrapped Token
A token that represents another asset one-to-one, so it can be used on a chain or in a standard it does not natively support.
By Crypto University Editorial
Bridge · Cross-Chain Bridge · Synthetic Asset · Token Standard (ERC-20) · Collateral
✦ Key Insight
A wrapped asset carries the risk of its wrapper on top of the underlying. Bridge failures have repeatedly left wrapped tokens unbacked and trading far below par.
✕ Common Misconceptions
Treating every wrapped version of an asset as interchangeable. Different bridges produce different wrapped tokens for the same underlying, each with its own backing and its own risk.
Detailed Explanation
Native coins often do not follow the token standard that DeFi contracts expect, so a wrapped version is used instead. Wrapping can also move an asset across chains, in which case a custodian or bridge holds the original and issues the wrapped claim. The wrapper is only as sound as whoever holds the backing.
In Practice
“A trader wraps a native coin to use it in a DeFi protocol that only accepts standard tokens, then unwraps it afterwards.”