Synthetic wrapped tokens allow one blockchain to connect to another.

Using bitcoin on the Ethereum blockchain isn’t possible by default. The two systems aren’t directly compatible. But there’s a workaround: synthetic wrapped tokens. These allow assets like bitcoin to be used on blockchains they weren’t built for.

A synthetic wrapped token is a version of a cryptocurrency that exists on a different blockchain. It matches the value of the original asset but uses a different token standard. For example, a wrapped version of bitcoin can be created to function on Ethereum. This lets users trade or use bitcoin in decentralized applications built for Ethereum.

One major advantage of wrapped tokens is that they improve cross-chain compatibility. This allows assets like bitcoin to be used in Ethereum-based DeFi protocols for lending, borrowing, or yield generation. As a result, wrapped tokens help increase liquidity and give users more ways to put their assets to work.

Wrapped Bitcoin (wBTC)

Wrapped bitcoin (wBTC) is the most widely used wrapped token. It’s an ERC-20 token that mirrors the price of bitcoin. Launched in 2019 by BitGo, Kyber, and Ren, wBTC is backed 1:1 by actual bitcoin held in custody. BitGo acts as the custodian, while merchants like DeversiFi or Kyber handle the conversion process.

To get wBTC, a user sends their bitcoin to a merchant. The merchant passes it to the custodian, who mints an equal amount of wBTC. When a user wants to switch back to bitcoin, the process is reversed: the wBTC is burned, and the bitcoin is released.

This system of minting and burning keeps the supply of wBTC matched to its bitcoin backing. It works similarly to how stablecoins maintain their value peg.

By bringing bitcoin into Ethereum’s ecosystem, wBTC makes it possible to use bitcoin in DeFi applications like Uniswap or Yearn, turning a static asset into one that can earn returns.