Alchemix set to be first user of the Sovereign Bridged Token Standard proposed by Connext Founder

Connext Labs, the pioneering blockchain interoperability protocol, announced xERC20, a mechanism for Web3 projects to bring their token to any chain, offering the best available security by using battle-tested canonical bridges under the hood. Connext’s announcement follows co-founder Arjun Bhuptani’s recently proposed ERC-7281 standard, which aims to fix the fragmented liquidity and security problems of token bridging by shifting ownership over supported bridges and security to token issuers. As part of the launch, Connext is announcing their partnership with Alchemix, a DeFi protocol for future-yield-backed synthetic assets, as the first flagship user of xERC20.

While the proposed ERC-7281 standard is still undergoing public review, Connext aims to be the first protocol to support deploying tokens of this type. Projects deploying xERC20s today with Connext will have full forward compatibility with the finalized ERC-7281 specification in the future, can transfer their tokens 1:1 between chains with minimal liquidity requirements, and utilize Connext’s unique approach to security, which leverages the battle-tested canonical bridges that are already widely used verify data going between chains. Connext’s xERC20s are live on mainnet and fully ready for projects to issue today.

“The ERC-7281 standard aims to fix the painful tradeoff space between the security risk of working with only a single bridge partner versus the high liquidity cost of supporting multiple bridges that token issuers today must navigate when bringing their token to multiple chains.  The proposed standard allows multiple bridges to mint the same token, and for token issuers to be able to add/remove supported bridges and configure rate limits for them at will,” explained Bhuptani, “This approach, which aims to be a pure, bridge-agnostic public good and requires minimal or no custom work for most ecosystems to support, encourages open competition and innovation as token issuers now have the flexibility granularly update their preferences for supported bridges over time. Instead of prioritizing building a monopoly on liquidity, or trying to corner market share by locking-in token issuers (or in some cases entire chains), bridges are now forced to have an ongoing focus on their security and quality of service, lest they be delisted.”

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Token bridging has been the source of much controversy in the past 2 years, with over $2B in capital being lost to hacks related to bridges. These hacks stem from 3rd-party bridges that mint/burn a proprietary representation of a given token on another chain. If the bridge gets hacked, these representations effectively become unbacked, leading to widespread contagion and fallout. The recent Multichain hack is an example, where projects’ lock-in on a single 3rd-party bridge provider created a systemic risk for chains. Other similar lock-in-based approaches include LayerZero’s Omnichain Fungible Token (OFT) and Axelar’s Interchain Fungible Standard.

Token issuers can alternatively choose to bridge tokens using liquidity-based mechanisms to avoid relying on any single bridge. However, this approach is only feasible for the most liquid or highly transferred of tokens, and introduces significant costs to both token issuers and bridges. These costs also scale with each new chain that is supported by a token issuer. With the rise of layer 3 blockchains such as those deployable in Optimism’s Superchain, Arbitrum Orbit, ZkSync L3s or Polygon 2.0, there are likely to be 100s of new chains in 2024, making a liquidity-based approach likely unfeasible for issuers long term.

Connext is rolling out xERC20 with Alchemix as their first flagship use case and partner. Alchemix Finance is a future-yield-backed synthetic asset protocol and community DAO offering Self-Repaying loans. The collateral that Alchemix users deposit to secure their loan is autonomously invested in the background into other DeFi products, and yield from that investment is used to pay off loan interest. Alchemix currently supports loans in alUSD (a USD-correlated synthetic asset representing the future yield of Alchemix depositors) and alETH, with over $70m in user deposits locked in the protocol. Alchemix is already live on mainnet with Connext, allowing alUSD and alETH to be transferred between instances of their protocol living on Ethereum, Optimism, and Arbitrum.

“The multichain situation has led Alchemix to re-evaluate its bridging system and to what extent bridging should be used in the ecosystem,” said Alchemix’s BizGov Lead, “Alchemix has a goal of progressive decentralization, and any upgrades to the protocol need to directly help Alchemix achieve this goal. With the primary Alchemix L2 deployment being Optimism, with Arbitrum soon launching, Connext’s system of relying on canonical bridges without introducing any 3rd party validator sets made the most sense for Alchemix to incorporate.”

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