Original | Odaily Planet Daily
Author | Loopy
Today, native USDC officially entered the Cosmos ecosystem, and Circle officially announced that CCTP has been connected to the Noble chain. The Noble chain is a chain within the Cosmos ecosystem, and the purpose of this chain is to introduce stablecoins to the Cosmos ecosystem.
Currently, after the deployment of CCTP, the Circle Cross-Chain Transfer Protocol (CCTP) has been launched on Noble’s test network on November 3, and is expected to be launched on the main network on November 28.
This development was done by Circle, Noble and dYdX teams, and its purpose is to facilitate the transfer of USDC from different networks to the dYdX chain. Although the main purpose is dYdX, thanks to the convenient IBC cross-chain, this will undoubtedly benefit the entire Cosmos ecosystem. This feature will introduce USDC to Cosmos in a simple, convenient and secure way.
Nathan Cha, head of marketing at dYdX, said that one of the main principles of DeFi is to increase accessibility for all users. dYdX is very happy to see such cooperation.
For Cosmos users, how is the introduction of CCTP different from other cross-chain bridges and other stablecoins? This starts with CCTP’s unique “minting-burning” mechanism.
Unique "destruction-minting" mechanism
CCTP stands for Cross-Chain Transfer Protocol, which is the official permissionless cross-chain bridge launched by Circle.
What makes CCTP different from common bridges is that this bridge does not adopt the common "lock-minting" mode, but the "destruction-minting" mode.
In the more mainstream "lock-and-mint" mechanism, the bridge protocol establishes a liquidity pool on two chains, and realizes the flow of tokens between different chains by locking tokens on the original chain and minting tokens on the target chain.
Since the permissions of the USDC contract are controlled by Circle, third-party bridges cannot mint native USDC. CCTP can destroy native USDC on the original chain and mint an equal amount of native USDC on the target chain.
After the user crosses the chain, CCTP will destroy USDC on the original chain. Circle will then collect evidence, including observing and proving the USDC destruction transaction on the original chain. The original chain application needs to request a "signature certificate" from Circle before it can be destroyed. At the same time, it must also obtain the "signature certificate" before it can authorize the minting of a specified amount of USDC on the target chain. After the minting is completed, the visitor will send the USDC to the recipient's wallet address.
In this process, there is no capital pool, and of course there are no hundreds of millions of funds deposited. This process optimizes capital efficiency and liquidity experience. More importantly for users, the USDC received on different chains is native USDC, which is directly guaranteed by Circle. There is no need to worry about the target chain's USDC and the native USDC of the original chain being decoupled.
In terms of applications, the main use cases given by Circle include transactions, lending, payments, NFTs and games, such as cross-chain swaps, cross-chain deposits, cross-chain purchases of NFTs, etc.
Without a funding pool, is cross-chain safer?
In the traditional cross-chain "lock-mint" model, the disadvantages are very obvious. In order to maintain the 1:1 price anchoring of the two currencies in the pool, LP providers are required to make markets, and the large number of locked tokens in the pool also become an excellent target for hacker attacks.
Odaily Planet Daily once counted the ten largest cross-chain bridge attacks in history. In March 2022, Ronin Network's cross-chain bridge was attacked, with a total loss of up to $624 million. This is also the largest cross-chain bridge theft in history. Chainalysis found that in 2022 alone, cross-chain bridge attacks have caused more than $2 billion in financial losses.
In addition, the "lock-up-minting" model naturally divides the two ends of the bridge into the "original chain" and the "target chain", and the tokens on both sides are native assets and bridge assets respectively. A large number of minted tokens are different from the native assets. If there is a security problem with the bridge, the minted assets on the target chain will face the risk of de-anchoring.
In the "pGALA incident" in November 2022, there were no problems with the GALA tokens deployed on the Ethereum mainnet. However, the pNetwork cross-chain bridge had security issues, and the pGALA issued and minted on the BNB Chain was massively over-issued. 1 BNB Chain pGALA no longer had the corresponding 1 Ethereum GALA as support, and pGALA immediately returned to zero.
For asset issuers, the problem of liquidity fragmentation on each chain also affects the use of assets. (CCTP documents show that this is what Circle cares about most - "unifying the liquidity of the entire ecosystem.")
Taking Avalanche as an example, there are currently two mainstream USDC tokens on this network. 599 million native USDC issued by Circle, with the contract number ending in "8a6E". 176 million USDC.e issued and minted by the Avalanche official bridge, with the contract number ending in "C664".
(The cross-chain asset USDC.e is not backed by fiat currency, but by USDC on the Ethereum chain through a bridge)
For users, there is no difference in the use experience of these two types of USDC. Both are worth $1 and can be used in major DEXs. But what's interesting is that if a user holds both types of USDC at the same time, both currencies will appear in the wallet at the same time. In the DeFi world of Avalanche, a large number of trading pairs based on two different USDCs are even more chaotic, and users will always inadvertently make inefficient transactions of "exchanging one USDC for another USDC".
Having two types of USDC on the same chain is a more intuitive way to experience liquidity fragmentation. This fragmentation is even more obvious when placed in a broader multi-chain ecosystem.
In order to use USDC on multiple chains, a large amount of non-native USDC is issued by the bridge. What is the native USDC doing at this time? It is locked in the fund pool as an LP. This locking model will undoubtedly sacrifice a lot of capital efficiency.
Generally speaking, in order to provide sufficient liquidity, mainstream bridges always need to lock up a large number of tokens at both ends of the bridge. Although these tokens can support daily transactions, they remain in the LP pool for a long time, which reduces the number of tokens that can be circulated in the market. We can roughly assume that in order to support the cross-chain flow of some tokens, a considerable amount of funds needs to be deposited in the pool and cannot be effectively used.
This undoubtedly reduces token liquidity and capital efficiency to some extent. CCTP will have a certain impact on many parties in the crypto world, and the first to be affected is the cross-chain bridge. Stablecoins are the currencies with high trading volume in major mainstream cross-chain bridges. CCTP may have a strong impact on the market share of cross-chain bridges.
In addition to the existing interoperability protocols, LPs may not welcome the arrival of CCTP. The lock-up model of traditional cross-chain bridges requires a large number of LPs to provide funds, and on major cross-chain bridges, stablecoin cross-chain LP market making has always been a low-risk target for earning profits.
Cosmos’ Stablecoin Dilemma
The deployment of CCTP on Noble is a major event worth recording for both Cosmos and Circle. But interestingly, dYdX is another partner that is actively promoting the deployment of the protocol.
Seemingly unrelated, dYdX will actually benefit greatly from the native deployment of USDC. In June 2022, dYdX announced that it would move to the Cosmos ecosystem and achieve migration in the upcoming dYdX V4 version. This is also the first time that a well-known Ethereum native DeFi application has chosen to escape.
However, after entering the Cosmos ecosystem, the uniqueness of the Cosmos ecosystem and the EVM ecosystem made dYdX face a dilemma similar to most applications in the ecosystem - a lack of stablecoins.
Odaily Planet Daily checked several mainstream large CEXs and found that most of them do not support stablecoin deposits and withdrawals on the Cosmos network. As an on-chain contract exchange, dYdX undoubtedly has a huge demand for stablecoins. The abundant stablecoin liquidity between the Cosmos ecosystem and the EVM ecosystem is undoubtedly of great help to dYdX.
Before the collapse of Terra, the demand for stablecoins within the Cosmos ecosystem had previously relied heavily on the algorithmic stablecoin UST on the Terra chain. After UST "returned to zero", the Cosmos ecosystem suffered a significant blow. Since then, Cosmos' native stablecoin has also been vacant.
Although Cosmos has Axelar cross-chain USDC, and cross-chain USDT and USDC through the Nomad bridge, these tokens are not native tokens. In the context of frequent security incidents, the security reputation of cross-chain bridges is not as stable as natively issued tokens. Moreover, the stablecoins issued by different cross-chain products are also dispersed in liquidity due to inconsistent mapping formats.
It was not until June this year that Tether officially announced that it would issue native USDT through the Kava network. This also made up for the lack of stablecoins in Cosmos, a prosperous and long-established ecosystem.
So far, the two major stablecoins, USDT and USDC, have both entered the Cosmos network. The cooperation between Circle, Noble and dYdX teams seems to be a win-win situation for all three. And for the Cosmos ecosystem, can the completion of the "last piece of the puzzle" of stablecoins lead the recently popular ATOM to a brighter future?
