Wrapped assets are assets that are represented in one way or another by another token. That is, each token has a 1-to-1 relationship to some other coin, token, or asset, and can be converted from one to the other.
Why is wrapped Tez needed
Let's consider the following facts:
Tez (XTZ) is the native currency built on the Tezos blockchain.
When an app is built on the Tezos Blockchain, it usually either implements its own form of token or needs to work with existing tokens, both are based on the FA standards.
The FA1.2 and FA2 standards define how tokens are transferred and how to keep a consistent record of those token transfers in the Tezos network.
Now here is the issue: XTZ doesn't conform to its own FA standards.
Indeed, XTZ is the proto-token of the Tezos Blockchain, i.e., it was built before the FA standards existed. This makes XTZ not compliant with the FA standards used by most Dapps, e.g., DEXs, NFT marketplaces, etc.
One solution consists in wrapping XTZ into an FA-compliant token called wXTZ. Wrapping XTZ allows you to trade them directly with alt tokens. You need wXTZ to trade XTZ for other FA tokens on decentralized platforms like Dexter and Quipuswap. Because decentralized platforms running on Tezos use smart contracts to facilitate trades, directly between users, every user needs to have the same standardized format for the tokens they trade. This ensures tokens don't get lost.
When you "wrap" XTZ, you aren't really wrapping so much as trading XTZ for an equal token called wXTZ via a smart contract. If you want to get plain XTZ back you need to "unwrap" it, i.e., trade it back for XTZ.
In practice, during the wrapping step, your XTZ are stored in a smart contract, and an equal amount of wXTZ is minted by the contract and transferred to you. When unwrapping, your wXTZ are burned (a.k.a. destroyed), and the equivalent in XTZ is released and sent back to you.
Properties of wXTZ
Liquid: wXTZ are liquid and may be used as a standard developer building block (FA1.2) for Tezos DeFi and to participate in DeFi systems on Tezos.
Collaterized: Each wXTZ token is collateralized with 1 tez (XTZ).
Rewards: Locked XTZ generates staking rewards from baking.
Secure: The suite of wXTZ contracts is audited by Trail of Bits and managed by StakerDAO.
Fees: Interacting with wXTZ has no fee from StakerDAO during the launch phase (contracts interaction requires only the standard network fees on the Tezos network). Changes to the fee structure will be managed by the StakerDAO governance process.
Non-custodial: XTZ locked in the smart contract to mint wXTZ are only redeemable by the user himself. No one can move or touch these tokens until the user burns its wXTZ and gets his or her XTZ back.
Please refer to the Medium article to learn more about wXTZ and get started.
Other wrapped assets
wXTZ is not the only wrapped asset on Tezos, one may want to interact with Ethereum or Bitcoin from a Tezos Smart contract. A wrapped asset can bridge an asset from a different native public blockchain network to the one in which it is wrapping itself.
StableTech has created Wrapped ETH (ETHtz) which is an FA1.2 token with a price pegged to ETH. ETHtz can be used on Tezos for exchanges or DeFi service while taking advantage of Tezos's much lower fees than Ethereum.
Wrapped Bitcoin (tzBTC) is another wrapped asset on Tezos pegged to BTC. tzBTC is also implemented using the FA1.2 asset standard on Tezos.
This way, one can use the consensus mechanism and the specific infrastructure of Tezos to use assets or information stored with both Tezos and Ethereum.
Wrapped assets not only improve the functionality and usability of the asset they wrap, but they also open up a wide array of higher-level financial services that wouldn't be available otherwise.
On Tezos, we've seen the addition of Wrapped XTZ (wXTZ), Wrapped Bitcoin (tzBTC), Wrapped ETH (ETHtz) and the addition of ERC-20 from Plenty Defi wrapped assets (among which, WBTC, USDC, WETH, BUSD, DAI, USDT, LINK, MATIC, agEUR).