How Does a “Wrapped” Token Maintain Its Peg to the Original Asset?
A wrapped token maintains its peg through a 1:1 backing mechanism enforced by a custodian or a smart contract vault. For example, to mint 1 wBTC (Wrapped Bitcoin), 1 native BTC must be locked in a secure vault.
The peg is maintained by the guarantee that any wBTC can be redeemed for 1 native BTC at any time. This redemption mechanism, combined with arbitrage opportunities that correct any price deviation, ensures the wrapped token's value remains closely tied to the underlying asset.
Glossar
Decentralized Wrapping
Mechanism ⎊ Decentralized wrapping represents a protocol-level function enabling the tokenization of illiquid or non-fungible assets into standardized, tradable representations on blockchain networks.
Wrapped Token
Definition ⎊ Wrapped Token describes a synthetic asset created on one blockchain that represents and is pegged 1:1 to an asset native to a different blockchain, facilitating its use within the smart contract ecosystem of the host chain.