Counterparty Risk
The risk that the other side of an arrangement, such as an exchange, lender, or issuer, fails to deliver what it owes you.
A direct on-chain transfer between two self-custodied wallets settles atomically and leaves no ongoing obligation, which is the sense in which blockchains reduce counterparty risk. It returns in full whenever a third party stands between you and the asset: balances held at a custodial exchange, coins lent to a yield platform, tokens issued as claims by a bridge, stablecoins redeemable only from their issuer, and positions on a derivatives venue. In each case the ledger entry you see is a promise, and its value depends on the promisor's solvency and honesty. The 2022 failure of FTX made this concrete for a large number of users who had treated an exchange balance as ownership.
En pratique
A wrapped token issued against assets held by a custodian is a claim on that custodian, so its value depends on the custodian continuing to hold and honor the redemption.
Le malentendu courant
That using a blockchain eliminates counterparty risk, when it does so only for direct on-chain settlement, and every custodial balance and claim token reintroduces it in full.