A wrapped token is a type of token whose price corresponds 1:1 to that of another cryptocurrency, but changing the underlying code. This allows the same value to be “translated” into another language so that a crypto is compatible with a different blockchain standard.
Wrapping is the process that converts cryptocurrencies into tokens, performed through software developed on blockchain. Specifically, the issuance of wrapped tokens is done by locking the original funds in a smart contract, which serves as a digital safe (vault), from which they can also be redeemed later. In order to recover the initial cryptocurrencies, in fact, the wrapped tokens will have to be destroyed by the custodial smart contract itself, through the burning mechanism. “Wrapping” a crypto into a token, then, is similar to issuing stablecoins in exchange for cryptocurrencies, only the wrapped tokens have variable value, not just unit value.
Wrapped tokens are also a solution for blockchain interoperability: they allow separate, autonomous networks to communicate, thus increasing the use cases of their respective cryptocurrencies. The value of a Bitcoin (BTC), for example, can be represented by a wBTC (wrapped Bitcoin) on the Ethereum blockchain, so as to take advantage of DeFi’s functionalities. This transforms a Bitcoin into an Ethereum ERC-20 token, which can then be recognized by DApps; wBTCs, for example, can be used in Yield Farming strategies, such as staking.