Wrapped Tokens are a type of cryptocurrency, whose value is pegged at a 1:1 ratio to another cryptocurrency.
Wrapped tokens are most useful when we need to move a currency created on one blockchain network onto a different blockchain network, and transact with it there. However, they can also be useful within the same network, allowing for tokens to be used in different ways.
The ‘wrapping’ process works by depositing or locking the original currency into a smart contract. Then, an equivalent representation of this currency, known as its wrapped version, is emitted to the user’s wallet. The unwrapping process takes place in the reverse order of wrapping. The wrapped tokens are ‘burnt’ and the original token is then released from the ‘wrapper’ contract. This process may happen across chains, via a bridge.
The entire process of wrapping the original currency and creating the new, wrapped currency is handled by smart contracts, whose function is visible to the public. Such smart contracts can be published by any type of individual or organisation (such as a DAO).
Another example is wrapped veTokens (e.g. sdCRV) from Stake DAO’s Liquid Lockers, which give users the benefits of veTokens (e.g. veCRV) without having to lock their funds for long periods of time.