What Are Wrapped Tokens? How WETH, WBTC, and Token Wrapping Work in DeFi

What Are Wrapped Tokens?

Wrapped tokens are digital assets that represent another cryptocurrency on a different blockchain or in a different token standard.

The most common examples are Wrapped Bitcoin (WBTC), which represents Bitcoin on the Ethereum network as an ERC-20 token, and Wrapped Ether (WETH), which converts Ethereum's native ETH into the ERC-20 token standard used by most DeFi applications.

In each case, the wrapped token is pegged one-to-one to the underlying asset, which means one WBTC is always redeemable for one BTC, and one WETH is always redeemable for one ETH.

Wrapped tokens solve a fundamental interoperability problem in crypto. Different blockchains operate as isolated systems with their own native tokens, consensus mechanisms, and smart contract standards.

Bitcoin cannot natively interact with Ethereum smart contracts, and Ethereum's native ETH token predates the ERC-20 standard that most DeFi protocols require. Wrapping creates standardised representations of these assets that can move freely through DeFi ecosystems.

This enables Bitcoin holders to earn yield on Ethereum, ETH to be used in protocols that only accept ERC-20 tokens, and assets from any chain to participate in DeFi applications on any other chain.

As of April 2026, the total market capitalisation of wrapped tokens exceeds USD 33 billion, with WBTC and WETH accounting for more than half of that figure.

How Token Wrapping Works

The wrapping process follows a general pattern regardless of which asset is being wrapped. A user deposits the original asset with a custodian or into a smart contract, and an equivalent amount of the wrapped token is minted on the destination chain.

When the user wants to unwrap, they send the wrapped token back, it is burned (permanently destroyed), and the original asset is released. This mint-and-burn mechanism maintains the one-to-one peg between the wrapped token and its underlying asset.

The critical difference between wrapped token implementations lies in how the underlying asset is custodied. Centralized wrapping relies on a trusted custodian, a company or consortium that holds the original assets and issues wrapped tokens against them.

For example, WBTC, was originally custodied entirely by BitGo, a regulated digital asset custodian. Users trust that BitGo holds one BTC for every WBTC in circulation, verified through proof-of-reserves attestations.

Decentralized wrapping removes the trusted custodian by using smart contracts, multi-party computation, or cryptographic threshold schemes. This is done to lock the original asset and mint the wrapped version without any single entity having custody.

The trade-off between these approaches is straightforward: centralized wrapping is simpler to implement and typically more capital-efficient, but introduces counterparty risk.

If the custodian is compromised, insolvent, or acts dishonestly, the wrapped tokens could lose their peg.

Decentralised wrapping eliminates single-entity custody risk but often involves more complex mechanisms, higher gas costs, and potentially slower processing times.

WETH: Why Ethereum Needs to Wrap Its Own Token

Wrapped Ether might seem paradoxical, why does Ethereum need a wrapped version of its own native asset?

The answer lies in Ethereum's history. When Ethereum launched in 2015, ETH was defined as the network's native gas token, used to pay transaction fees.

The ERC-20 token standard, which defines how fungible tokens work on Ethereum, was introduced later in November 2015 and formalised as EIP-20 in 2017.

Because ETH predates ERC-20, it does not natively conform to the standard, it lacks the approve, transferFrom, and other functions that ERC-20 tokens implement.

This creates a practical problem. Most DeFi protocols, lending platforms, decentralized exchanges, yield aggregators, are built to interact with ERC-20 tokens.

Over 95 per cent of Ethereum-based lending protocols require ERC-20-compatible tokens. To use ETH in these protocols, it must be converted to WETH, which is a fully ERC-20-compliant representation.

The WETH smart contract is elegantly simple: you send ETH to it, and it credits you with an equal amount of WETH. To unwrap, you call the withdraw function, the WETH is burned, and your ETH is returned.

The contract holds the ETH directly, meaning WETH is always backed one-to-one with no custodian involved, it is entirely trustless.

In practice, WETH wrapping and unwrapping has become almost invisible. Most modern DeFi interfaces handle the ETH-to-WETH conversion automatically when a user interacts with a protocol that requires ERC-20 tokens.

DEX aggregators, lending platforms, and yield protocols typically wrap and unwrap ETH behind the scenes, so users may interact with WETH without ever explicitly choosing to wrap their ETH.

As of April 2026, WETH accounts for approximately 40 per cent of the total wrapped token market capitalisation, making it the single most widely held wrapped asset in DeFi.

WBTC: Bringing Bitcoin to Ethereum

Wrapped Bitcoin is the most significant cross-chain wrapped token, allowing Bitcoin holders to access Ethereum's DeFi ecosystem without selling their BTC. WBTC launched in January 2019 through a collaboration between BitGo (custodian), Kyber Network, and Republic Protocol (now Ren).

The mechanism is straightforward: authorised merchants deposit BTC with BitGo, which mints an equivalent amount of WBTC on Ethereum. To redeem, the process reverses, WBTC is burned and BTC is released from custody.

WBTC became a foundational DeFi asset, widely accepted as collateral on lending platforms like Aave and Compound, tradeable on virtually every Ethereum DEX, and usable in yield strategies across the ecosystem.

At its peak, over 280,000 BTC were wrapped as WBTC, representing billions of dollars in value. As of April 2026, approximately 119,000 WBTC are in circulation, with a market capitalisation of approximately USD 9.4 billion.

However, WBTC's centralised custody model became a source of significant controversy in 2024. In August, BitGo announced a restructuring of WBTC custody into a multi-jurisdictional joint venture with BiT Global, a Hong Kong-based entity associated with Tron founder Justin Sun.

The announcement triggered immediate concern across the DeFi ecosystem. Major protocols including MakerDAO (now Sky) and Aave initiated reviews of WBTC as a collateral asset, with governance proposals to reduce or eliminate WBTC exposure.

The concern centred on the involvement of Justin Sun, whose prior acquisition of the TrueUSD stablecoin had been followed by the resignation of its management team, suspension of real-time proof of reserves, and multiple de-peg incidents.

The controversy accelerated the emergence of alternative wrapped Bitcoin products.

Coinbase launched cbBTC in September 2024 on Ethereum and its Layer 2 network Base, which quickly grew to become the second-largest wrapped Bitcoin token with a market capitalisation exceeding USD 2 billion.

Threshold Network's tBTC offers a more decentralized alternative, using a network of node operators and threshold cryptography to custody the underlying BTC without a single custodian.

Kraken launched kBTC as its own custodial alternative. Despite the competition, WBTC remains the largest wrapped Bitcoin by a significant margin, though its market share has declined from its previous near-monopoly.

Other Important Wrapped Tokens

The wrapping concept extends well beyond WETH and WBTC. Liquid staking tokens like Lido's stETH and its wrapped form wstETH are technically wrapped tokens. This means wstETH wraps the rebasing stETH into a non-rebasing format that is compatible with DeFi protocols that cannot handle balance changes.

Wrapped staked ETH has become one of the most widely used collateral assets in DeFi, accepted on lending platforms, used in liquidity pools, and bridged across multiple Layer 2 networks.

Cross-chain bridges create wrapped tokens as a core part of their operation. When a user bridges USDC from Ethereum to Arbitrum using a canonical bridge, the USDC is locked on Ethereum and a wrapped representation is minted on Arbitrum.

Different bridges produce different wrapped versions, bridged USDC from the canonical Arbitrum bridge is a different token from native USDC issued directly on Arbitrum by Circle.

This distinction matters because native tokens (issued directly on the destination chain by the original issuer) are generally considered lower-risk than bridge-wrapped versions, which carry the additional risk of the bridge contract.

Yield-bearing wrapped tokens are an increasingly important category. When you deposit USDC into Aave, you receive aUSDC, a wrapped token that represents your deposit plus accruing interest.

Compound's cTokens, Yearn's yTokens, and Pendle's principal and yield tokens are all forms of wrapped tokens that encode additional financial properties beyond simple one-to-one asset representation.

These tokens can themselves be wrapped further. You can deposit aUSDC into another protocol, creating layers of wrapping that enable complex DeFi strategies but also compound smart contract risk.

Risks of Wrapped Tokens

Wrapped tokens introduce several categories of risk that users should understand.

Custodial risk applies to any centrally custodied wrapped token. If the custodian holding the underlying asset is compromised, becomes insolvent, or acts dishonestly, the wrapped token may lose its peg.

The WBTC custody controversy demonstrated how changes in custodial arrangements can create uncertainty even for established tokens with long track records.

Smart contract risk is present in every wrapped token. The wrapping contract itself can contain vulnerabilities, and the risk compounds when wrapped tokens are used in DeFi protocols.

Each additional layer of smart contract interaction adds potential failure points. Bridge-wrapped tokens carry the additional risk of the bridge contract, and bridge exploits have historically been among the largest losses in DeFi.

The Wormhole bridge exploit in February 2022, which resulted in approximately USD 320 million in losses, involved the fraudulent minting of wrapped ETH on Solana.

De-peg risk exists for all wrapped tokens, though the mechanisms differ.

For custodial tokens, a de-peg can result from loss of confidence in the custodian.

For bridge-wrapped tokens, a de-peg can occur if the bridge is exploited or if liquidity on the destination chain is insufficient to maintain price stability.

For algorithmic wrapped tokens, bugs in the wrapping mechanism or oracle failures can cause deviations from the intended peg.

Liquidity fragmentation is a systemic concern. Multiple wrapped versions of the same asset on the same chain (for example, WBTC, cbBTC, tBTC, and kBTC all representing Bitcoin on Ethereum) split liquidity across different pools and markets.

This fragmentation means that no single wrapped version has as deep liquidity as it would if there were only one standard, resulting in higher slippage for traders and less efficient capital allocation.

Wrapped Tokens and Portals.fi

Portals.fi is a DeFi aggregation platform that simplifies interactions with wrapped tokens across multiple chains.

Users can swap between wrapped and native assets, manage bridged positions, and access DeFi protocols that use wrapped tokens, all through a unified interface that handles wrapping, unwrapping, and routing automatically.

This article is for informational purposes only and does not constitute financial advice. Wrapped tokens carry risks including smart contract vulnerabilities, custodial risk, bridge exploits, and potential de-pegging events.

The value of wrapped tokens depends on the security and solvency of their underlying mechanisms. Always conduct your own research before holding or using wrapped tokens in DeFi. For our full disclaimer, please visit disclaimer.