How Does the Use of “Wrapped Assets” Contribute to Systemic Risk?

Wrapped assets (e.g. wBTC) are tokens on one blockchain representing an asset on another. They introduce a single point of failure (the custodian or bridging mechanism).

If the custodian fails or the bridge is exploited, the wrapped asset becomes worthless. Since wrapped assets are often used as collateral across multiple DeFi protocols, their failure can trigger a massive, systemic liquidation cascade.