Wrapped Token

The wrapped version of Avalanche's native AVAX token on its own C-Chain (Contract Chain), which is EVM-compatible. Similar to WETH, WAVAX converts the native AVAX into an ERC-20 standard token to ensure compatibility with the suite of DeFi applications built on Avalanche. The wrapping contract is maintained by the Avalanche core team and is fundamental to the chain's ecosystem.

Represents a cross-chain router protocol that creates wrapped assets (e.g., anyUSDC, anyETH) for moving liquidity between many heterogeneous blockchains. It uses a network of secure MPC nodes to lock assets on the source chain and mint wrapped versions on the destination. This model creates a wrapped asset bridge for dozens of chains, though it centralizes trust in the node network rather than a single custodian.

Wrapped tokens are the primary output of cross-chain bridges. These protocols lock an asset on its native chain (e.g., BTC on Bitcoin) and mint a corresponding wrapped version (e.g., WBTC on Ethereum) on the destination chain. This unlocks native asset liquidity for use in decentralized exchanges (DEXs), lending markets, and yield farms on otherwise incompatible networks.

• Example: Wrapped Bitcoin (WBTC) brings Bitcoin's liquidity to Ethereum DeFi.
• Mechanism: A custodian or multi-sig holds the original asset, issuing the wrapped token 1:1.

Wrapped assets are fundamental to DeFi composability, allowing non-native assets to be used as collateral, swapped, or supplied to generate yield. A wrapped token like WETH (Wrapped ETH) is essential on Ethereum, as many protocols require ERC-20 tokens, not native ETH.

• Use Cases:
  • Collateral: Deposit wBTC to borrow stablecoins on Aave.
  • Trading: Swap wMATIC for USDC on Uniswap.
  • Yield Farming: Supply wstETH (wrapped staked ETH) to a liquidity pool.

Not all wrapped tokens are equal. A canonical wrapper (like WETH on Ethereum) is the official, universally accepted standard on its chain. Bridged wrappers (like multichain.xyz's anyBTC) are issued by specific bridge protocols and may have different security models and liquidity pools.

• Key Distinction: Canonical wraps are ecosystem infrastructure; bridged wraps are interoperability solutions.
• Risk Consideration: Using a bridged wrapper introduces bridge risk (e.g., validator compromise) on top of the underlying asset's risk.

Liquid Staking Tokens (LSTs) like Lido's stETH or Rocket Pool's rETH are a specialized form of wrapped token. They represent a claim on staked native assets (e.g., ETH) and the accrued staking rewards, while remaining liquid and transferable.

• Function: Wrap staked capital into a tradable ERC-20 token.
• Ecosystem Impact: Enables restaking (e.g., via EigenLayer) and use of staked positions as DeFi collateral without unbonding periods.

Major stablecoins like USDC and USDT exist as native issuances on multiple chains (e.g., Ethereum, Solana, Avalanche). When moving between chains via a bridge, you often receive a bridged wrapper of the stablecoin. It's crucial to distinguish between the canonical, natively-issued asset and its bridged version, as they may not be fungible and have different redemption paths.

• Example: USDC.e on Avalanche was a bridged version from Ethereum before native USDC issuance.

Wrapped tokens adhere to the destination chain's token standard (e.g., ERC-20, BEP-20, SPL). Their security depends on the custody model of the underlying assets:

• Centralized Custodian: A single entity (e.g., BitGo for WBTC) holds reserves. Introduces counterparty risk.
• Multi-Sig / MPC: A decentralized group or threshold signature scheme controls reserves.
• Algorithmic / Overcollateralized: Protocols like MakerDAO's wrapped Bitcoin (WBTC) vaults use overcollateralized debt positions to mint the wrapped asset.

Most wrapped tokens rely on a centralized custodian or multi-signature wallet holding the underlying assets. This creates a single point of failure. If the custodian is compromised, becomes insolvent, or acts maliciously, the peg can break, rendering the wrapped tokens worthless. This is distinct from the decentralized security of the native asset's own network.

• Example: Wrapped Bitcoin (WBTC) relies on a merchant consortium for custody.
• Mitigation: Users must trust the transparency and security practices of the custodian.

The wrapping smart contract and any associated cross-chain bridge are critical attack surfaces. Exploits here can lead to the minting of illegitimate wrapped tokens or the theft of locked collateral.

• Bridge Hacks: Major losses have occurred from bridge exploits (e.g., Wormhole, Ronin Bridge), where attackers minted wrapped assets without proper collateral.
• Contract Bugs: Flaws in the mint/burn logic or upgrade mechanisms can be exploited.
• Risk: A bridge hack compromises all assets bridged through it, not just a single user's funds.

Maintaining a 1:1 peg requires accurate price feeds and proper redemption mechanisms. Manipulation of the oracle providing the asset's price to the wrapping system can allow attackers to mint tokens unfairly or drain reserves.

• Oracle Failure: If the oracle reports an incorrect price, the system may allow undervalued minting or overvalued redemptions.
• Liquidity Crunch: A sudden mass redemption (bank run) can strain the custodian's liquidity, potentially breaking the peg if underlying assets are not immediately available.

Wrapping systems often have admin keys or governance mechanisms with elevated privileges. These can pause contracts, change critical parameters, or upgrade contract logic.

• Centralization Risk: A small set of keys controls the entire system.
• Malicious Upgrade: An upgrade could introduce code that drains funds or alters redemption rules.
• Transparency: Users must monitor governance proposals and admin key changes, which adds operational overhead.

When assets move between chains with different consensus mechanisms and finality times, a wrapped token's existence depends on the security assumptions of the lightest chain in the bridge. A reorganization (reorg) on the source chain after assets are issued on the destination chain can create insolvency.

• Example: If Bitcoin (with probabilistic finality) is wrapped onto Ethereum, a deep reorg could reverse a deposit transaction after WBTC has been minted.
• Mitigation: Bridges implement confirmation wait times (e.g., 6+ Bitcoin confirmations) to reduce this risk.

Wrapped tokens are deeply integrated into DeFi protocols as collateral. A failure of a major wrapped asset (like WBTC or WETH) could trigger cascading liquidations and insolvencies across multiple lending and trading platforms.

• Contagion Risk: The depegging of a widely used wrapped token would impact all protocols holding it.
• Liquidity Dependency: The wrapped token's utility depends on liquidity pools on the destination chain; low liquidity can exacerbate peg deviations during market stress.

ERC-20 is the dominant token standard on Ethereum, defining a common interface for fungible tokens. Most wrapped assets on Ethereum (like WETH, WBTC, WMATIC) are ERC-20 tokens, enabling seamless integration with DeFi protocols. ERC-777 is a more advanced standard offering improved functionality (like hooks for transactions) and built-in mint/burn permissions, which can be more efficient for wrapping mechanisms than ERC-20.

A canonical wrapped token is the officially recognized, most liquid, and often original version of a wrapped asset on a given chain (e.g., WETH on Ethereum, WBTC on Ethereum). Non-canonical wrapped tokens are alternative versions created by different bridges (e.g., renBTC, tBTC). They carry different trust assumptions, liquidity, and security models. DeFi protocols often whitelist only canonical versions to mitigate bridge risk.

A synthetic asset (or synth) is a token that tracks the price of an underlying asset but is not directly backed 1:1 by it. Unlike a wrapped token, which is collateralized by a locked reserve, synths are typically backed by a collateral pool of other assets (e.g., in Synthetix). They replicate exposure through financial engineering and oracle price feeds, introducing different risks like collateral liquidation and oracle failure.