Wrapped Token
A token that represents another asset on a different blockchain. Wrapped Bitcoin (WBTC) allows Bitcoin to be used as collateral on Ethereum-based lending protocols.
Bitcoin doesn't speak Ethereum. They run on separate blockchains that can't communicate natively, which means you can't post BTC as collateral on Aave or Compound — at least not directly. A wrapped token solves this by locking the original asset in a custodied vault and minting a 1:1 representative token on the target chain.
For a lender or borrower, this matters immediately. Wrapped Bitcoin (WBTC) lets you put your Bitcoin to work on Ethereum-based protocols — earning yield, borrowing stablecoins, or supplying liquidity — without selling your BTC position.
How It Works
The process has two steps. A custodian (in WBTC's case, BitGo) holds the real BTC in reserve. A corresponding amount of WBTC is minted on Ethereum — one WBTC always represents one BTC.
On a lending protocol, WBTC behaves like any other ERC-20 token. Aave, for example, accepts WBTC as collateral with its own loan-to-value ratio — historically around 70-73%. That means $100,000 in WBTC collateral lets you borrow up to roughly $70,000-$73,000 in other assets.
To redeem, you burn the WBTC and the custodian releases the underlying BTC. The peg holds as long as the custodian is solvent and the reserve is fully backed — which is the part that deserves scrutiny.
Why It Matters
Wrapped tokens unlock liquidity that would otherwise sit idle. Bitcoin holders represent a massive pool of capital that, without wrapping, can't participate in DeFi lending at all. WBTC alone has regularly represented billions in total value locked across major protocols.
What is Wrapped Token?
A token that represents another asset on a different blockchain. Wrapped Bitcoin (WBTC) allows Bitcoin to be used as collateral on Ethereum-based lending protocols.
Full glossary entryThe same logic applies to assets on other chains. Wrapped ETH (wETH) exists because native ETH predates the ERC-20 standard, so many protocols require the wrapped version. Wrapping is the plumbing that makes cross-asset lending possible.
Bill's Take
In 25 years of mortgage lending, I dealt with plenty of assets that needed to be converted before a bank would accept them as collateral — think pledged securities or out-of-state property. The bank didn't want the asset itself; it wanted something it could value and liquidate on its own terms. Wrapped tokens are the same idea. The protocol can't hold real BTC, so it accepts a standardized IOU that it knows how to price and liquidate. The innovation is real. So is the dependency on whoever is holding the original asset.
What to Watch
The most common misunderstanding: people treat WBTC as if it IS Bitcoin. It isn't. It's a claim on Bitcoin held by a custodian. If that custodian is hacked, insolvent, or compromised, the peg breaks — and your collateral value can collapse independent of what actual BTC is doing on its own chain.
What is Yield?
The return earned on a crypto investment, typically expressed as APY. In crypto lending, yield comes from interest paid by borrowers, protocol incentives, and governance token rewards.
Full glossary entryCustodian Risk
Custodian risk is not theoretical. Always check who holds the underlying reserve, whether the custody is audited, and whether the wrapping mechanism is centralized or uses a decentralized bridge. Centralized custodians introduce a single point of failure that has nothing to do with the smart contract you're lending through.
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