Wrapped tokens are designed to move the economic value of a native cryptoasset onto another blockchain. The best-known example is WBTC, a wrapped form of bitcoin that follows the ERC-20 standard and can be used inside Ethereum-based applications.
The structure is built around a 1:1 peg. A native asset is locked in reserve, then an equivalent amount of wrapped tokens is minted on another network. When a holder wants the original asset back, the wrapped tokens are burned and the reserve asset is released. The point is simple: blockchains do not natively interoperate well, so wrapped tokens create a practical bridge for usage. Bitcoin cannot be used directly on Ethereum, and ERC-20 tokens cannot run directly on the Bitcoin blockchain.
How the wrapping process works
The source explains that a custodian handles minting, while a merchant initiates the request. Merchants named in the material include Airswap, AAVE, and CoinList. For every wrapped token issued, an equal amount of the original asset is held on-chain in reserve. In the case of WBTC, each 1 WBTC is backed by 1 BTC.
That makes wrapped tokens dependent on reserves and redemption mechanics rather than functioning as independent substitutes. Their role is to expand where an asset can be used, not to replace the original coin itself.
The largest wrapped tokens by market value
According to the material, wrapped tokens have a combined market capitalization close to $10 billion. WBTC accounts for more than 75% of that total, making it the dominant wrapped asset. The article lists WBTC at $7,614,971,730 in market capitalization. It was launched in 2019 by BitGo, Kyber, and Ren, with its main appeal tied to bringing BTC into Ethereum DeFi and decentralized applications.
WBNB is the BEP-20 version of BNB. It can be used directly on BNB Smart Chain, traded against other BSC assets, or swapped for ERC-20 tokens to support cross-chain transfers. Its market capitalization is given as $1,240,402,808.
renBTC is another ERC-20 token pegged to bitcoin. The source says it was launched in 2021 as a product of RenVM and has a market capitalization of $1,292,020,564. Unlike WBTC, which uses a burn-based redemption process, renBTC relies on a direct supply peg intended to keep reserves sufficient for its circulating supply.
Where wrapped tokens are used most
The main use cases sit inside DeFi. The source lists five of them: margin trading, DeFi lending, liquidity provision, crypto loan collateralization, and yield farming. In practice, assets such as WBTC allow bitcoin holders to put BTC-linked value to work on protocols like Aave, MakerDAO, and Compound.
That can mean lending into pools for interest, adding liquidity to earn fees, or posting wrapped assets as collateral for borrowing. The article also notes that DeFi systems have often relied heavily on ETH as collateral. Bringing in wrapped assets such as WBTC broadens the collateral base and adds liquidity to those protocols.
Risk remains tied to custody and contract execution
Wrapped tokens are generally described as safe because they are backed by the original asset and aim to maintain a 1:1 value relationship. Even so, the source points out an important distinction: holding wrapped bitcoin is not the same as holding native BTC, because the holder does not control the private keys to the bitcoin locked in reserve.
Users are also trusting the smart-contract-based wrapping process and the operational setup around it to keep working as intended. If something breaks at the technical or operational level, access to the original asset could be affected. The article says this has not been the case for Wrapped Bitcoin, but it remains a risk holders need to consider. The same logic applies inside Ethereum itself: ETH is the native asset, while WETH is its wrapped version, and their value is essentially the same.