What is a wrapped token? How Bitcoin is used on other blockchains
By SendPay Business · · 2 min read
A wrapped token is a token on one blockchain that represents a coin from another blockchain, one for one. The best-known example is wrapped Bitcoin, which lets Bitcoin be used in apps built on Ethereum.
How wrapping works
- The original coin, such as Bitcoin, is sent to a custodian or a smart contract.
- It is locked up and held there.
- An equal amount of the wrapped token is created on the other blockchain.
- To unwrap, the wrapped token is destroyed and the original coin is released.
Why people use them
Different blockchains cannot read each other directly. Wrapping lets a coin be used in DeFi apps, lending pools and exchanges on another chain. Wrapped ether is also used on Ethereum itself so that ether works like any other token in smart contracts.
The risks
A wrapped token is only as good as whoever holds the original coins. If the custodian or the bridge is hacked or fails, the wrapped token may lose its backing. Several large crypto bridge hacks have shown this risk is real.
Where SendPay fits
SendPay does not offer wrapping or bridging. A SendPay platform lets your customers buy, sell and hold crypto next to their cash, with assets held with regulated partners and a trading fee you set.
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This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. PayPal, Patreon and Substack are named as reference points only and are not affiliated with SendPay Business.