What Are Wrapped Assets in DeFi? Understanding Cross-Chain Tokens Like WBTC and WETH

Imagine you own Bitcoin, but you want to earn interest on it inside Ethereum’s DeFi apps. You can’t just send BTC to Aave or Compound - those platforms only understand Ethereum tokens. That’s where wrapped assets come in. They’re digital tokens that act like stand-ins for your Bitcoin, Ethereum, or other coins, letting them work across blockchains without you ever selling your original asset.

How Wrapped Assets Actually Work

Wrapped assets are simple in concept but technical in execution. Each wrapped token is backed 1:1 by the real asset locked in a reserve. For example, when you wrap Bitcoin into WBTC, your BTC gets sent to a secure vault. In return, you get an equal amount of WBTC on Ethereum. That WBTC can then be used like any other ERC-20 token - deposited into lending protocols, traded on DEXs, or used as collateral.

The process works in reverse too. When you want your Bitcoin back, you burn your WBTC, and the custodian releases your original BTC. It’s like exchanging a voucher for the real thing. The key is trust: someone has to hold the real asset while the wrapped version circulates. In WBTC’s case, that’s BitGo, a regulated custodian that uses a 3-of-5 multi-signature system. No single person can move the funds - it takes at least three out of five approved parties to approve a withdrawal.

Why WETH Exists (Even Though ETH Is Native to Ethereum)

You might wonder: if Ethereum already has ETH, why do we need WETH? The answer is technical history. ETH was created before the ERC-20 standard became the norm. Many DeFi protocols - like Uniswap, Aave, and Compound - were built assuming all tokens follow ERC-20 rules. ETH doesn’t. So to make ETH usable in those apps, it gets wrapped into WETH. It’s still 100% ETH, just formatted to play nice with smart contracts. WETH is so widely adopted that it controls 99.8% of all wrapped Ether usage. If you’re using ETH in DeFi, you’re almost certainly using WETH behind the scenes.

The Big Players: WBTC vs. renBTC vs. sBTC

Not all wrapped Bitcoin is the same. There are three main versions competing for dominance:

• WBTC - The original and still the largest. Launched in 2019 by BitGo, Kyber, and Republic Protocol, it’s backed by a centralized custodian. As of late 2023, it holds over $7.8 billion in value and is used by Coinbase, Ledger, and major DeFi protocols. It’s fast, reliable, and compliant - but it’s also the most centralized.
• renBTC - A decentralized alternative. Instead of a single custodian, renBTC uses a network of “darknodes” that lock up REN tokens as collateral. If someone tries to cheat, they lose their stake. It’s more trustless, but slower and more expensive to use. It holds about $1.5 billion, or 18.7% of the wrapped BTC market.
• sBTC - A synthetic version, not backed by actual Bitcoin. Instead, it’s created using price oracles and over-collateralized crypto. It’s riskier - if the oracle fails or the market crashes, sBTC can de-peg from Bitcoin’s value. It’s only 9.4% of the market.

WBTC dominates because it was first, and it’s backed by big names. But renBTC is growing faster - up 217% in 2023 - as users demand more decentralization.

Real-World Use Cases: Why People Use Wrapped Assets

People don’t wrap assets just to play around. They do it to unlock real financial opportunities:

• Earning yield - Lending WBTC on Aave can earn you 3.2-4.7% APY, compared to just 1.8-2.5% for ETH. That’s a big difference if you’re holding tens of thousands of dollars.
• Collateral for loans - Institutions like Grayscale now use WBTC as collateral to borrow DAI without selling their Bitcoin. This avoids capital gains taxes and keeps their BTC exposure intact.
• Trading and liquidity - WBTC is one of the most traded tokens on Uniswap. Its liquidity lets traders swap between BTC and other assets quickly without leaving the Ethereum ecosystem.

On Reddit, users report that wrapping BTC into WBTC changed their entire DeFi strategy. One user said they made more in six months lending WBTC than they did holding BTC for two years. But there’s a catch - when Ethereum gas fees spike, unwrapping can take hours or cost hundreds of dollars in fees.

The Risks: Centralization, Hacks, and Broken Pegs

Wrapped assets aren’t risk-free. The biggest concern is centralization. WBTC’s entire system relies on BitGo and four other entities controlling the multi-sig keys. Chainalysis found that 97.3% of WBTC custody depends on this small group. That’s the opposite of Bitcoin’s “no trust needed” philosophy.

Then there are hacks. In August 2022, the Nomad Bridge was exploited, and $600 million in wrapped assets - including WBTC, WETH, and others - vanished. The problem wasn’t the wrapped tokens themselves, but the bridge that moved them. Smart contract bugs, flawed governance, and poor audits can all lead to catastrophic losses.

And even if the system works, you still pay fees. Most platforms charge 0.1% to 0.5% to wrap or unwrap. During market volatility, those fees can spike. Coinbase users report surprise charges of 0.3% when they least expect it.

What’s Next? The Future of Wrapped Assets

The industry knows these risks. That’s why new solutions are emerging:

• WBTC v3 - Launched in late 2023, it now requires 4-of-7 signatures instead of 3-of-5. That reduces the chance of a single point of failure by 62%.
• Chainlink CCIP - A new cross-chain protocol that lets assets move between blockchains without custodians. Early tests show 99.98% peg accuracy.
• Ethereum’s EIP-7251 - If approved, this update could make ETH fully compatible with DeFi protocols, potentially making WETH obsolete in a few years.

Analysts predict that by 2027, custodial wrapped assets like WBTC will drop to 40% of the market. Trust-minimized bridges will take over. But for now, wrapped assets are still the glue holding DeFi together.

How to Get Started

If you want to try wrapped assets:

1. Choose your asset - BTC for WBTC, ETH for WETH.
2. Decide between centralized (Coinbase, Binance) or decentralized (RenBridge, Wormhole). Centralized is easier; decentralized is more trustless.
3. Connect your wallet (MetaMask, Phantom, etc.).
4. Deposit your native asset.
5. Wait 1-60 minutes for the wrapped version to arrive.

Watch out for:

• Gas fees on Ethereum - they can be high during congestion.
• Confusing renBTC with WBTC - they’re not interchangeable in all protocols.
• Redemption delays - if the network is slow, unwrapping might take hours.

Start small. Test the process with $100 before locking up thousands.

Frequently Asked Questions