How Does Wrapping a Token Introduce a Form of Centralization Risk?
Wrapping a token often introduces centralization risk because the underlying asset is typically held by a centralized custodian or a small group of entities. If this custodian is compromised, or acts maliciously, the peg between the wrapped token and the original asset could break.
This single point of failure contrasts with the decentralized nature of the underlying blockchain.
Glossar
Centralization Risk
Risk ⎊ Centralization Risk evaluates the potential for single points of failure, undue influence, or censorship within cryptocurrency networks or financial intermediaries, which undermines the core value proposition of decentralization.
Single Point of Failure
Concentration ⎊ In crypto derivatives, this risk materializes when excessive collateral or governance control resides with a small number of entities, such as a few large liquidity providers or key developers.
Centralization
Architecture ⎊ Centralization, within cryptocurrency, options trading, and financial derivatives, denotes a concentration of control and decision-making power, often manifested through centralized exchanges or custodians.