Bridging Cryptocurrencies Exposed: The Hidden Risks of Wrapped Tokens

The concept of bridging cryptocurrencies is often misunderstood. It doesn't involve physically moving tokens from one blockchain to another, but rather locking the original asset on the source chain and minting a corresponding wrapped or bridged token on the destination chain.

This structure introduces risks such as smart-contract, counterparty, and systemic risks, as warned by Ethereum's official bridge documentation. If a bridge gets hacked, the consequences can be severe.

When a bridge holds 10,000 ETH on Ethereum and issues 10,000 wrapped ETH tokens on another blockchain, the relationship between the two is crucial. Normally, each wrapped token is backed by one ETH in reserve. However, if an attacker drains 6,000 ETH from the bridge contract, the wrapped asset becomes undercollateralized.

The market may immediately react to this change by selling the wrapped tokens below their native ETH price due to uncertainty about their redeemability. This situation is similar to a stablecoin depeg, where the missing collateral sits within cross-chain infrastructure rather than a stablecoin reserve.