A wrapped or pegged token is a tokenized version of another cryptocurrency. It’s pegged to the value of the asset it represents and typically can be redeemed for it (unwrapped) at any point. One perfect example of a wrapped token is WBTC or Wrapped Bitcoin. WBTC is minted on another network like Ethereum through some mechanism, and use the BTC as a token on that network.
A wrapped token will always have the same value as the original crypto. For example one WBTC is always equal to one BTC. If one BTC is equal to $60,000, then one WBTC is also equal to $60,000.
Wrapped tokens can increase liquidity and capital efficiency both for centralized and decentralized exchanges. The ability to wrap idle assets and use them on another chain can create more connection between otherwise isolated liquidity.
Users send their crypto to a centralized custodian like Binance and keeps them in a cold storage wallet. Then, a pegged token is minted and issued by the exchange.
Learn more: What are Binance-Peg Tokens?
Instead of a centralized custodian, tokens are minted either via a smart contract or a virtual machine that’s keeping the funds safe. Ren Virtual Machine (RenVM) is one of the most popular non-custodial implementation that mints wrapped tokens.