Connext and Alchemix join forces to launch a cross-chain token standard aiming to minimize losses from bridge exploits.

Connext and Alchemix join forces to launch a cross-chain token standard aiming to minimize losses from bridge exploits.

The Evolution of Token Standards in the Blockchain Industry

Blockchain technology has revolutionized many aspects of our lives, including the way we transact and store value. One of the fundamental elements of this technology is the token, which represents a digital asset on a blockchain network. Tokens have historically been subject to vulnerabilities, particularly when it comes to cross-chain bridging. However, a recent announcement by the Connext cross-chain bridging protocol has brought hope for increased security and minimized losses with the introduction of a new token standard called xERC-20.

Introducing xERC-20: A Bridge to Safer Cross-Chain Transactions

Cross-chain bridging protocols facilitate the movement of tokens across different blockchain networks. However, these bridges have been susceptible to hacks, leading to significant financial losses for token issuers and end users. Recognizing this issue, Connext, in collaboration with decentralized finance (DeFi) platform Alchemix Finance, has introduced the xERC-20 token standard. This standard aims to provide greater control and security for token issuers while reducing the risk of bridge hacks.

The xERC-20 token standard enables token issuers to maintain a list of official bridges and control how many tokens can be minted by each bridge. Instead of each bridge issuing its own version of a token on every network, the new standard allows bridges to mint “official” or “canonical” versions of tokens with the permission of the token issuer. This permission is enforced through smart contracts, ensuring that bridges cannot mint tokens without authorization.

By limiting the number of coins that a specific bridge can mint, token issuers can exercise control over their assets, reducing the likelihood of unauthorized minting or token duplication. Additionally, the xERC-20 standard discourages the creation of derivative coins by bridges, as these would not be considered “canonical” versions. This incentivizes consumers to reject unofficial versions of coins, ultimately leading to a more secure DeFi ecosystem.

Enhancing Security and Accountability

In the blockchain industry, the responsibility for securing tokens and preventing bridge hacks has primarily fallen on the bridging protocols themselves. However, with the implementation of the xERC-20 standard, the responsibility shifts to the token issuers. This paradigm shift is vital as it aligns risk with the parties who have the most at stake.

Arjun Bhuptani, the founder of Connext, emphasized the importance of this approach in enhancing open competition and innovation among bridges. Token issuers now have the flexibility to update their preferences for supported bridges over time, encouraging bridges to prioritize security and quality of service instead of attempting to build monopolies on liquidity or corner market share. Bhuptani states, “bridges are now forced to have an ongoing focus on their security and quality of service, lest they be delisted.”

Steps Towards Approval and Implementation

The xERC-20 token standard was originally proposed as Ethereum Improvement Proposal (EIP) 7281 on July 7, 2023. Connext’s founder, Arjun Bhuptani, co-authored this proposal, recognizing its potential to enhance security and minimize losses from bridge hacks. To become an official part of the Ethereum ecosystem, an EIP must be approved by EIP editors, a process that can take months. However, Connext and Alchemix Finance have decided to implement the xERC-20 standard ahead of its official approval, enabling users to benefit from its enhanced security features immediately.

It is important to note that even before widespread adoption, the xERC-20 token standard has already gained significant attention due to the recent news of a hack on the Multichain bridging protocol, resulting in the loss of over $100 million. This incident has further emphasized the urgency for improved security in cross-chain transactions and the importance of initiatives like the xERC-20 standard.

Conclusion

The blockchain industry is constantly evolving, with new challenges and innovations emerging daily. The introduction of the xERC-20 token standard by Connext and Alchemix Finance represents a significant step towards enhancing security and minimizing losses from bridge hacks. By giving token issuers greater control and holding them accountable, this standard encourages bridges to prioritize security and quality of service. Ultimately, this initiative will contribute to building a more robust and secure DeFi ecosystem, protecting the interests of token issuers and end users alike.

Related article: Multichain bridge hack was a “big blow” to Fantom ecosystem, says Cronje

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