wrapped token

A wrapped token is a tokenized IOU: a token on one chain that represents a claim on some underlying asset held elsewhere. The point is to let an asset that lives in one environment be used in another. Wrapped Bitcoin (WBTC) lets Bitcoin be used in Ethereum DeFi: real BTC is locked with a custodian, and an equal amount of an ERC-20 called WBTC is minted on Ethereum. Burn the WBTC and the custodian releases the BTC. The wrapper is only as sound as whatever holds the backing.

There are two broad backing models, with very different trust assumptions. Custodial wraps (like WBTC) rely on a named entity to actually hold the underlying and honor redemptions; you trust that custodian's solvency and honesty. Bridge-minted wraps lock the asset in a smart-contract bridge on the source chain and mint a representation on the destination chain; here you trust the bridge's code and its validators or multisig. In both cases the wrapped token is a derivative whose value depends entirely on redeemability of the backing.

This is why wrapped tokens are a recurring source of risk. If the custodian becomes insolvent, the bridge is hacked, or the validator set is compromised, the backing can vanish while the wrapped tokens keep circulating, and the wrapped asset depegs from the thing it was supposed to represent — several of the largest crypto exploits have been bridge hacks that left wrapped tokens unbacked. Same-chain, same-asset wraps like WETH are the benign extreme; long cross-chain bridges of borrowed value are the dangerous one.