Core Question

We have all come across wrapped tokens like WBTC on SOL thinking, is it safe to use BTC on Solana because it is fast and cheap? 

Understanding wrapped tokens

Wrapped tokens are essentially tokens that represent another token that doesn't natively live on that blockchain. They usually have backing by the issuer. That means that if I have 1 WBTC, the issuer/custodian will have 1 native BTC locked away. That means that at any time, you can go and redeem you wrapped tokens for the exact same value as the native one. 

The positives

The positive is pretty obvious. Wrapped tokens allow you to interact with all kinds of cryptos all on the same chain. This is useful if you only have a SOL address, or only a ETH address and don't want the complications of managing multiple networks, fees, protocols, and wallets. 

Another big positive is that wrapped tokens can decrease the fees and the transaction time. The major example is the Solana network. It has multiple version of wrapped Bitcoin, wrapped Ethereum, wrapped BNB, and a bunch of other tokens. 

The quirk

Before I get into the negatives, there is something worth mentioning that confused me when I started crypto. There is wrapped Solana, but what I found weird was that this exists on the Solana blockchain, and believe it or not, it is the most common wrapped token on Solana. The reason for this is that DeFi and dApps all support the many SPL tokens, while supporting native SOL would require another complex code, which people don't want. You can also wrap and unwrap WSOL for SOL or vice versa at any time on Solana

The negatives

The biggest drawback is that wrapped tokens can lose their peg and backing. When you exchange BTC for WBTC or ETH for WETH, you are giving the custodian your real native crypto, and they essentially give you a token that says you have a claim on a certain amount of that crypto. However, these tokens are their own thing. This means that say a bunch of people dump their wrapped token, the price will momentarily depeg, causing extreme slippage before arbitrage bots correct the price by buying. 

Another major risk is that if the smart contract gets exploited or hacked, you lose your claim to the crypto (because the custodian doesn't have any left), leaving you with a worthless token.

Are they still safe

I personally do not interact with any wrapped token. For me, the risk of losing my funds is greater than the convenience they offer that I don't even need. So for people just getting crypto to HODL, trade, speculate, hedge inflation, or because it is the only form of payment accepted in your area (or they offer discounts by paying with crypto), then wrapped tokens are definitely a no. 

However, if you need to maybe earn yield on you BTC, need a DeFi application, or a dApp requires it, then it is a pretty good thing. But the core rule I would recommend is unless you need it, don't get it. Never buy more than you need, and don't use it to replace the native tokens, and your future self will greatly appreciate your past self.

To learn about the risks of lending crypto, read this article (it was made for USDC, but it applies to all cryptos): link

DISCLAIMER

I am not a financial advisor. This article is just my opinion, not advice. Don't take this as the thing you should follow, because there are a ton of paths in crypto.