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A corruption of the word “Owned.” This originated in an online game called Warcraft, where a map designer misspelled “owned.” When the computerbeat a player, it was supposed to say, so-and-so “has been owned.”
Instead, it said, so-and-so “has been pwned.”
It basically means “to own” or to be dominated by an opponent or situation, especially by some god-like or computer-like force.