How Do Wrapped Tokens Represent The Original Asset On Another Chain?

Blockchain technology was conceptualized on the basis of independence. This means that every blockchain network, whether it is bitcoin or any other, follows its set rules while being secured. Although this independence enhances the concept of security, there arises a problem called fragmentation. By this, resources built on one network cannot smoothly work on another network.

As blockchain adoption expanded, this limitation became more visible. For instance, developers wanted to utilize Bitcoin’s value in Ethereum smart contracts to access DeFi opportunities, but direct cross-chain transactions were technically impossible. Wrapped tokens emerged as the solution, enabling digital assets to function on different blockchains while maintaining their original value. They achieve this through locks, smart contracts, and blockchain bridges.

This article explains how wrapped tokens represent original assets on another chain and explores their processes, infrastructure, benefits, constraints, and examples, including Wrapped Bitcoin (WBTC).

What are Wrapped Tokens?

Wrapped tokens are the tokenized form of cryptocurrencies that are based on a different blockchain platform from the blockchain they originated on. Essentially, they are not the commodity but a digital representative that represents the same thing.

Wrapped tokens are characterized by their 1:1 aspect. This implies that:

• Each wrapped token represents one unit of the original asset.

• The original asset is locked or secured elsewhere

• The supply of the wrapped token exists for only the period when the original asset is locked

Wrapped tokens enable the economic value of an asset to be expressed in different ecosystems, while the underlying blockchain on which the asset is based remains the same.

Example: Wrapped Bitcoin (WBTC)

A practical illustration of wrapped tokens is Wrapped Bitcoin (WBTC).

• What it is: WBTC is an ERC-20 token on Ethereum fully backed 1:1 by Bitcoin.

• How it works: For every WBTC in circulation, an equivalent Bitcoin is locked in custody. Users can mint WBTC by depositing BTC and redeem BTC by burning WBTC.

• Use case: WBTC allows Bitcoin holders to participate in Ethereum-based DeFi applications such as lending, borrowing, and yield farming—opportunities that would otherwise be inaccessible for native Bitcoin.

This example demonstrates how wrapped tokens bridge ecosystems, unlocking liquidity and interoperability without compromising the original asset. 

How Wrapped Tokens Represent the Original Asset on the Other Chain

Wrapped tokens are based on an opaque and auditable process, catering to value consistency, transparency, and trust. The mapping of the original asset is carried out using the process of locking, minting, and redemption.

Step-by-Step Breakdown of Wrapped Token Process

• Asset Locking

  The original cryptocurrency is tied up in the native blockchain. That means the original cryptocurrency cannot be spent while its wrapped counterpart is in existence.

• Verification of Lock

  The blockchain bridge or protocol checks if the asset is securely locked to prevent anyone from reproducing the asset.

• Minting of Wrapped Tokens

  On successful confirmation, the wrapped token is minted in a corresponding amount on the target blockchain.

• Circulation on the New Chain

  Now the token can be used without restrictions within the receiving ecosystem.

• Burning and Unwrapping

  Once the user wishes to receive back his original asset, his wrapped token is burned, resulting in the unlocking of his locked asset.

This guarantees that no wrapped tokens contribute to increasing supply and that wrapped tokens always correspond to actual assets that are locked away in this process.

How Blockchain Bridges Perform the Function of Asset Representation

Blockchain bridges are the backbone of wrapped token systems. They stand in place to act as communication layers between blockchains, which otherwise could not interact.

What Do Blockchain Bridges Do?

• Monitor source blockchain for deposits

• Validation of transactions via validators or smart contracts

• Trigger the minting of the wrapped token on the destination blockchain

• Manage burning and asset release during redemption

Without blockchain bridges, there wouldn't be such a thing as wrapped tokens. They ensure that the original asset and its wrapped representation remain in constant harmony across chains.

Custodial vs Decentralized Wrapped Token Models

Wrapped tokens rely on different trust models, each influencing how the original asset is secured.

Custodial Wrapped Tokens

In custodial systems:

• A centralized entity holds the locked asset

• Users trust the custodian to maintain full reserves

• Asset backing is often audited

Advantages

• Faster processing

• Easier user experience

Limitations

• Centralization risk

• Dependency on a single entity

Decentralized Wrapped Tokens

In decentralized systems:

• Smart contracts manage locking and minting

• Multiple validators confirm transactions

• No single party controls the assets

Advantages

• Reduced trust dependency

• Greater transparency

Limitations

• Higher technical complexity

• Potential smart contract risks

WBTC is an example of a custodial wrapped token, where a consortium of custodians maintains BTC reserves.

Both models aim to accurately represent the original asset but differ in governance and risk exposure.

The Importance of Wrapped Tokens for Cross-Chain Interoperability

Wrapped tokens are more than just a hack. A key part of the multi-chain system.

Key Advantages Explained

• Cross- chain utility

  Assets add functionality beyond the functionality of blockchain.

• Liquidity Expansion

  Capital becomes available on multiple ecosystems.

• DeFi Participation

  Assets can be utilized either for the purpose of lending, staking, or generating yield.

• Capital Efficiency

  Users are not required to sell their assets in order to use other blockchains.

• Ecosystem Connectivity

  The networks start to become interlinked instead of remaining isolated.

Wrapped tokens like WBTC demonstrate these advantages by enabling Bitcoin holders to engage in Ethereum-based DeFi, effectively linking two independent networks.

Wrapped Tokens vs Native Tokens