Cryptocurrency players avoid Multichain amidst bridging rumors

Important players in the cryptocurrency ecosystem are taking measures to protect themselves due to growing concerns about the state of Multichain, a significant platform for transferring assets between different blockchains.

Four days after technical difficulties began affecting some users’ ability to withdraw tokens from the protocol, rumors about Multichain’s safety and the future of its team are circulating in the absence of any official statements. A single tweet attributing some cross-chain issues to “force majeure” has only added to the widespread speculation that something is wrong.

The lack of concrete information is causing an increasing number of entities to manage their risk, regardless of Multichain’s actual situation. Their reactions highlight how crypto bridges can create problems that go far beyond the most prominent and well-known risk to bridges (that of being hacked by North Korea).

This situation is exacerbated by Multichain’s importance among bridges. According to Messari and DeFiLlama, it is the third-largest bridging protocol in terms of transfer volume and total value locked.

Like most bridges, Multichain uses a mint-and-lock mechanism to transfer assets between the 92 blockchains it interacts with. For example, if a USDC stablecoin holder transfers the asset from Ethereum to Fantom via Multichain, the token is locked in a smart contract on Ethereum and then reissued on Fantom – in this situation, as a “wrapped” token called anyUSDC.

DeFiLlama reports that anyUSDC and other wrapped USDC tokens like it account for 50% of Fantom’s stablecoin market. This is despite all USDC on Fantom being bridged assets rather than “native” assets issued directly onto the chain by Circle. As a result, all USDC tokens on Fantom depend on bridges to retain their value.

This system works as long as the bridge is functioning correctly. During Multichain’s recent troubles, it did not, and wrapped USDC tokens on Fantom lost their dollar peg. During the commotion over Multichain, some arbitrage traders told CoinDesk that they purchased wrapped USDC tokens at a 30% discount. Multichain is responsible for 80% of the stablecoins on Fantom.

Last Friday, Binance, the world’s largest cryptocurrency exchange, hinted at the dangers of non-native assets with a tweet urging traders to “remember to check you trust the issuer behind stablecoins you hold.”

The fact that the Fantom ecosystem relies heavily on Multichain has not yet prompted market participants to flee. Despite some outflows to other chains, overall metrics such as total value locked remain relatively stable, according to data from terminal-builder Parsec.

“The multichain bridge is fully operational and safe with Fantom. Whatever is happening internally with multichain has no impact on the bridged assets on Fantom,” Michael Kong, CEO of the Fantom Foundation, told CoinDesk.

This chart shows anyUSDC transfers from Fantom (blue) and other chains into Arbitrum over the last 10 days. The uptick corresponds with the swirling rumors. (Parsec)

Squid Router, a bridging protocol built on Axelar that uses swaps rather than wrapped tokens to move value across chains, also saw a surge in activity during the Multichain crisis. People familiar with the matter said that bridge transactions on Axelar itself increased sixfold during the spike.

Multichain’s practice of wrapping assets to bridge them has scared players beyond the stablecoin markets. On Thursday, Binance announced that it would temporarily suspend deposits in ten tokens bridged by Multichain “while we await clarity from the Multichain team.”

Bridging aggregation service Li.Fi also took preventative measures yesterday and closed access to Multichain.

Meanwhile, Multichain’s namesake asset, MULTI, has suffered. At press time, it was trading at $3.8, down 54% from before the crisis of confidence began.

Edited by Stephen Alpher.

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