Wrapped token is a representation on chain B of an asset that natively lives on chain A. Wrapped Bitcoin (WBTC) on Ethereum is the canonical example: real BTC sits in custody (BitGo, originally), and an equivalent ERC-20 token circulates on Ethereum. The Ethereum-side WBTC is fungible with other WBTC, redeemable for real BTC, and usable in Ethereum DeFi.
The architectures you'll see
Three patterns:
Custodial wrapped tokens. A centralized custodian (BitGo for WBTC, Coinbase for cbBTC) holds the original asset and mints an equivalent token on the destination chain. Trust the custodian; the wrapping is a financial product, not a cryptographic construction.
Decentralized bridges. Wormhole, LayerZero, and similar bridge protocols mint wrapped tokens via a validator set or relay network. No single custodian; the trust assumption is the bridge's signer set or relay design. Higher transparency, more attack surface — every major bridge has been exploited at some point.
Native bridge wrapping. Layer-2 networks' canonical bridges (Arbitrum, Optimism, Base) issue wrapped versions of L1 tokens. The wrapping happens as part of the rollup design; the underlying assets are escrowed in the rollup's L1 contract. Considered the most secure form because the underlying tokens are protected by L1 consensus.
Why wrapped tokens exist
To make assets from one chain usable in the smart-contract environments of another chain. BTC has no smart contracts; ETH-based DeFi protocols want BTC liquidity. The solution: WBTC, which lets users supply BTC-denominated collateral to Aave, swap BTC on Uniswap, or LP a WBTC-ETH pair on Curve.
This unlocked roughly $5 billion in WBTC TVL on Ethereum at peak. Without wrapping, BTC holders would have no way to participate in ETH DeFi without selling.
The risks unique to wrapped tokens
Three layers:
Custodian or bridge risk. If the entity holding the underlying asset fails, the wrapped token becomes worthless. WBTC depends on BitGo's continued operation; if BitGo's custody fails, every WBTC holder takes a loss. cbBTC depends on Coinbase. The 2023 BitGo restructuring made some WBTC holders nervous but no permanent loss occurred.
Depeg risk. Even when the underlying is safe, market stress can cause the wrapped token to trade below the underlying's price. WBTC has traded as low as 0.97 BTC in past stress events; cbBTC has been more stable thanks to Coinbase's market-making support.
Smart-contract risk. The wrapping contract can have bugs. Multichain's collapse in July 2023 trapped roughly $600M of wrapped assets across many chains; users could not redeem the originals.
The 2026 landscape for a US holder
WBTC remains the largest wrapped Bitcoin token, but cbBTC has been growing rapidly since Coinbase launched it in September 2024. cbBTC has an advantage for US-resident holders: the custodian is a US-regulated, publicly traded company subject to SEC, FinCEN, and state oversight. The trust assumption shifts from "trust BitGo's operational continuity" to "trust Coinbase's regulatory continuity."
For ETH-based wrapping: ETH itself is not typically "wrapped" in a meaningful sense (you can use ETH directly on Ethereum). However, on L2s, the canonical bridge wraps ETH as L2-ETH. For specific protocols, wrapped ETH (WETH) exists as an ERC-20 representation of ETH that some contracts require — Uniswap uses it for ETH pairs. WETH is one of the safest wrapped tokens: the wrapping is a deterministic 1:1 lock-and-mint with no custodial dependency.
The general principle
Every wrapped token adds a counterparty risk on top of the underlying asset. For US holders building long-term custody plans, prefer the unwrapped original where possible. Use wrapped tokens for specific DeFi interactions you cannot get any other way, in sizes you can afford to lose if the wrapping fails.
Further reading: Bridge, DeFi, Stablecoin.