In cryptocurrency, "wrapping" refers to the process of converting a native asset (like Bitcoin or Ethereum) into a tokenized version that can be used on a different blockchain. This process is often used to enable interoperability between blockchains. This allows assets from one network to be used in decentralized applications (dApps) or decentralized finance (DeFi) protocols on another blockchain.
For example, wrapping Bitcoin (BTC) into Wrapped Bitcoin (WBTC) allows BTC holders to use their Bitcoin in the Ethereum blockchain, as Ethereum’s smart contracts cannot directly interact with Bitcoin. To wrap Bitcoin, a user would deposit their BTC with a custodian who then issues an equivalent amount of WBTC on the Ethereum network.
Wrapping is typically done by a smart contract, ensuring the wrapped asset is fully backed by its native counterpart. In this way, the asset's value is maintained. It also helps enhance liquidity and expands the utility of assets across different blockchain ecosystems.