A wrapped asset is a tokenized representation of an underlying asset adapted for use in a different token format or blockchain environment. Wrapping changes how an asset can interact with applications; it does not create an additional independent reserve of the underlying asset.
Wrapping and redemption
In a common design, underlying assets are deposited with a smart contract or custodian and corresponding tokens are issued. Redemption removes the wrapped tokens from circulation and releases the underlying assets under the arrangement’s rules. Cross-chain versions may also rely on a bridge, but wrapping need not cross a blockchain boundary.
For example, canonical WETH on Ethereum represents ETH in the ERC-20 format and can be unwrapped for the same amount of ETH, excluding transaction gas costs. By contrast, wstETH represents a changing quantity of stETH through its conversion rate. A one-to-one unit ratio is therefore not a universal property of wrapped assets.
Uses and additional risks
Compatible applications may accept wrapped assets for trading, lending or collateral. The relevant network, contract address and redemption mechanism matter more than a familiar ticker alone.
Contract defects, compromised bridges, custodian failures or restricted redemption can separate a wrapped token’s market price from the value it represents. Wrapping does not remove the underlying asset’s price risk, and a token balance alone does not prove that its backing is available.