Wrapped Tokens

Basics

• Wrapped tokens are IOU's of native tokens or coins.

Well known examples

• The most used wrapped tokens are wrapped versions of Bitcoin, and notably wrapped tokens of BTC on Ethereum. In total over 250,000 BTC live on Ethereum, over 1% of every BTC that will ever exist (29-6-2021), which is multitudes more than have been locked within LN (1500BTC).

• WBTC, TBTC, RenBTC and WETH.

Pros and Cons

Pros

• Wrapping a native coin can give the benefits of it becoming an ERC20 on Ethereum, or another token standard on a different blockchain. Becoming an ERC20 means that the token can be used in all kinds of smart contracts used in DeFi. These often come with yield opportunities which attract people more than simple HODLing their coin on their native blockchain.

Cons

• The positives of having different functionalities when you wrap a token, also come with a downside. You might gain functionality in usage, but you will loose the security of the original native blockchain. Your wrapped BTC is not actual BTC, but an ERC20 IUO for a BTC. This comes with new layers of trust and security risks.
• Some of the wrapped token projects (WBTC for example) are custodial, taking away the trustless nature of BTC.