What is a wrapped token, and where is the risk?

A wrapped token is a copy of an asset on another network, such as bitcoin traded on Ethereum. The asset itself does not move. It is held somewhere, and on the destination network a "receipt" for the same amount is created. That receipt is worth exactly one thing: the promise that the original really is there and will be handed back when you ask.

How one is made

1. The original asset is handed to a custodian: a company, or a smart contract called a "bridge".
2. The same amount of the wrapped token is created on the destination network.
3. To go back, the wrapped token is burned and the original is released.

So a wrapped token is not the bitcoin or the USDT itself. It is a promise that some bitcoin or USDT has been set aside for you.

Three places the promise breaks

The custodian. If the custodian goes bankrupt, spends the asset, or never had it, the wrapped token still shows on your screen but nothing stands behind it.

The bridge. Bridges hold a great deal of value in one place, which has made them some of the biggest targets for hackers. In 2022 alone, more than a billion dollars was stolen from blockchain bridges.

Sanctions and freezes. If the custodian or its addresses are put on a sanctions list, exchanges refuse its assets, and issuers such as Tether can freeze the USDT at those addresses. The wrapped copy keeps trading on the other network, but what stood behind it can no longer be withdrawn.

There is a fourth risk too: a token that only exists on one small network only has buyers there. You cannot take it to a large exchange and sell it.

Five questions before you buy

1. Who is the custodian? Is the name, the place of registration and the person responsible known?
2. Are the reserve addresses published? A serious custodian announces the addresses holding the original asset, so anyone can check them on the blockchain. "We hold this much bitcoin" without addresses is only a claim.
3. Can it be redeemed? Who swaps the wrapped token back for the original, on what conditions and how quickly?
4. Is it on a sanctions list? Official sanctions lists are public and name companies and even wallet addresses.
5. Where else does it trade? If nowhere, getting out of it is hard too.

If any of these has no clear answer, what you are buying is a receipt from someone you do not know.

At Money Harbor

A balance on any custodial platform, Money Harbor included, is also a promise at heart. That is why:

• Deposits are checked against the blockchain every night by separate code, and the result is live on the transparency page.
• Only real USDT and TRX on the Tron network are credited. A token that is merely called USDT reaches nobody's balance. You can check any USDT you receive with USDT Check.
• A deposit from an address frozen by Tether, or from an address on the official sanctions lists, is reviewed before it is credited.
• Every withdrawal is a real transaction on the blockchain that you can see for yourself.

This is educational. It is not investment advice.