Wrapped tokens, often referred to as wrapped assets or wrapped tokens in DeFi, are a concept used to represent traditional assets, such as cryptocurrencies or tokens, on blockchain platforms that don't natively support these assets. The purpose of wrapping these assets is to enable their use within DeFi applications and smart contracts.
Wrapped tokens provide interoperability between different blockchain ecosystems and enable assets from various chains to be utilized in DeFi applications, which are often built on Ethereum. Common examples of wrapped tokens include Wrapped Ethereum (WETH), Wrapped Matic (WMATIC), and many others, where the "wrapped" version represents the original asset on its native blockchain.
Here's how wrapped tokens work:
Original Asset: Let's say you have an asset like ETH or MATIC, and you want to use it in a DeFi application or trade it on a blockchain platform like Ethereum, which primarily uses its native token, Ether (ETH).
Wrapping Process: To make the original asset compatible with the target blockchain, you can "wrap" it. This process typically involves locking up the original asset in a smart contract on the original blockchain, and in return, you receive an equivalent amount of wrapped tokens on the target blockchain. You can wrap your ETH, MATIC, or BNB on Matcha by trading ETH for WETH, MATIC for WMATIC, and BNB for WBNB respectively.
Usage in DeFi: Once you have wrapped tokens, you can trade them on DEXs (or DEX Aggregators like Matcha). In fact, in order to place a limit order with Ethereum or Matic, you must use its Wrapped counterpart to make the trade as they are ERC-20 tokens. Additionally, Wrapping Ethereum also allows Matcha users to utilize our Matcha Auto feature.
Redeeming: If you wish to return to the original asset, you can redeem the wrapped tokens by "un-wrapping" the token. The smart contract will then release the locked original asset to you. You can do this on Matcha by swapping Wrapped ETH or MATIC for their respective native token.
Keep in mind that the specifics of how wrapped tokens are created and managed can vary, but the fundamental idea remains the same: making non-native assets compatible with the target blockchain's ecosystem, which allows users to engage in DeFi-compatible services.
📚 Recommended reading to learn more about wrapped ETH and the ERC-20 standard: