Are there any disadvantages?

16 Wed, Feb 2022

Mitchell

Mitchell

As decentralisation is at the core of blockchain technology, some would argue that wrapping tokens actually undermines this, as users have to use central intermediaries or third-party custodians in order to actually wrap a token. Even Ethereum’s very own Vitalik Buterin explained that many of the issued tokens are in fact sensitive to centralisation as they depend on the platform that issues them. As wrapped tokens are based on central decisions, there is a risk of market consumption and abuse of power. He went on to say “I’m worried about the trust models of some of these tokens. It would be sad if there ends up being $5b of BTC on Ethereum and the keys are held by a single institution”. 

Some users might find wrapping tokens which in essence is bridging different cryptocurrencies on different blockchains, would provide a hassle. As users have to put their wrapping requests through a merchant and/or custodian, there can be long wait times and additional fees for the “wrapping” and “unwrapping” of the tokens, which can prove costly. For instance, with Ethereum, the wrapping and unwrapping of the tokens can require huge gas fees, with some users paying greater gas fees than what the initial token is worth.