Centralisation

The other issue with using wrapped tokens is that it required a higher degree of centralisation. As explained earlier, to wrap a token, you must lock your actual crypto asset with a custodian, who mints and burns the wrapped tokens. This requires you to trust the intermediary to perform this wrapping for you – not an independent smart contract.

Buterin himself questioned the trustworthiness of these entities offering to take your coins in exchange for their various wrapped version, believing that increased use of them could encourage bad behaviour in terms of market consumption and manipulation.

“I’m worried about the trust models of some of these 
tokens. It would be sad if there ends up being $5b 
of BTC on Ethereum and the keys are held by a single 
institution.”

So if you do need to use wrapped tokens, or require wrapping your cryptocurrency, do ensure you’re using a mature wrapping product or bridge. Also, try not to hang on to your wrapped tokens too long unless you obviously need to do so – for instance, to contribute liquidity on a DEX swapping pool.

The sooner you can redeem or burn your wrapped tokens for your original ones, the better.

Of course, one can expect wrapping and bridging technology to improve, and security to also strengthen. As bridging and wrapping become easier and simpler, it may very well be that one day in the near future, we may all be able to move assets freely between blockchains without even realising that they actually don’t connect directly to one another.

Until then, wisely weigh your wrapping risks against holding your crypto assets.