Wrapped assets and bridges explained
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A wrapped asset is a token issued on one chain as a claim on assets held on another. Its price tracks the original only while the promise of redemption holds. If the custody side is compromised, the claim loses its backing.
Key points
- A token that represents a claim on assets held on another chain
- The price peg rests on redemption remaining possible
- Custody varies: a custodian, a multisig, or a contract
- If the bridge is broken, the claim loses its backing
Definition
A claim-style token minted on one chain in exchange for assets deposited on another. Returning the token burns it and releases the deposited assets.
Bitcoin cannot be used directly by contracts on Ethereum. The workaround is to deposit BTC and mint an ERC-20 token on Ethereum as the receipt, so it can be used in DeFi. That token is a wrapped asset, and its value rests entirely on the deposited coins behind it.
Custody comes in degrees. A single company may hold the deposits, a multisig of several signers may control them, or a contract that verifies the other chain's state may. Who holds the keys and how many signatures move funds determine how much trust the arrangement actually requires.
Bridges have been the target of some of the largest losses in the sector. When key management fails, or a flaw lets someone forge a deposit proof, the backing assets are drained while the wrapped tokens remain outstanding — and the wrapped token's price separates sharply from the original asset.
Watch out for
- · A wrapped asset is a claim ticket; if the bridge is broken, it can lose its value entirely
- · Same name, different issuer means a different token with different backing terms
- · Thinly traded wrapped assets can only be sold well below the reference price