There are at least two major risks to consider when deciding if wrapped cryptocurrencies are right for you. The first, and perhaps more relevant to most people, is the security of your wrapped tokens.
Security :
When it comes to the security of individual blockchain networks, there can be arguments from many people about which blockchain is more secure.
Few people would question the security of Bitcoin or Ethereum – these are highly mature networks that continue to become increasingly difficult to attack and manipulate by malicious parties. This owes mainly to the type of algorithm that is securing them. Bitcoin and – until the new version launches in late 2022 – Ethereum both rely on the Proof of Work algorithm to secure their networks.
Currently, throughout most of the DEFI ecosystem, where wrapped tokens are used, networks use the Proof of Stake system, which can be considered less secure and more vulnerable to exploitation from hackers or thieves.
Bitcoin holders on the actual Bitcoin network feel that they are very safe from hacks, as the Bitcoin network is virtually impregnable to hacking attempts.
But wrapping protocols and bridging products have been known to fail, with users losing their wrapped tokens to exploits. For example, in February 2022, the massive Wormhole bridge was successfully exploited, causing users to lose 120,000 wrapped ETH or wETH (at the time, valued at over $320 million).
Vitallik Buterin, the co-founder of Ethereum, believes that some of these security limits of bridges are fundamental and cannot really be fixed, preferring instead a “multi-blockchain” ecosystem rather than cross-chain applications or blockchain interoperability which wrapping and bridging are all about.
“ ..it's always safer to hold Ethereum-native assets on
Ethereum or Solana-native assets on Solana than it is
to hold Ethereum-native assets on Solana or
Solana-native assets on Ethereum.”
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