Custodial wrapping refers to the process where a native cryptocurrency is held by a centralized entity and a corresponding token representing that asset is issued on a different blockchain. This method enables assets from one blockchain to function on another, facilitating cross-chain compatibility and liquidity. The custodial entity maintains control of the original asset, backing the wrapped token one-to-one.
Context
Wrapped tokens, a product of custodial wrapping, are prominent in decentralized finance, allowing assets like Bitcoin to be used in Ethereum-based DeFi protocols. While they enhance interoperability, concerns persist regarding the centralization risk associated with the custodian holding the native assets. The security and transparency of these custodial arrangements remain critical points of discussion and scrutiny in the digital asset community.
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