How Do Centralized versus Decentralized Wrapping Mechanisms Differ in Terms of Risk?

Centralized wrapping mechanisms rely on a single custodian to hold the underlying asset, introducing counterparty risk and a single point of failure. Decentralized wrapping mechanisms use a network of validators or a smart contract to secure the collateral, distributing the risk.

However, decentralized systems carry smart contract risk and potential governance vulnerabilities. The trade-off is between counterparty risk and protocol risk.