Circle’s Cross-Chain Transfer Protocol: Bridges Will Evolve, They May Not Survive

On April 26, 2023, Circle launched the Cross-chain Transfer Protocol (CCTP). CCTP is a permissionless onchain tool by Circle that facilitates native USDC transfers between different blockchains. Live on Ethereum and Avalanche, Circle plans on expanding CCTP to additional networks throughout 2023, including Solana.

Why CCTP?

Traditional bridges have relied on lock-and-mint models, which lock USDC on the source chain and mint a wrapped version of the USDC on the destination chain. There are significant drawbacks to this, including fragmentation of liquidity from different bridges minting their own versions of USDC,  and more importantly, a significant security risk in having to rely on the trust assumptions of the bridge minting the wrapped USDC. These unproven bridge security models have led to significant hacks that leave wrapped versions of an asset valueless. Notable examples include the Ronin bridge hack where 173.6K ETH and 25.5M USDC tokens were exploited, worth more than $600M. Another example is the Wormhole hack in February 2022, where $236M worth of tokens were exploited.

Given the concerns with bridges minting wrapped assets, other bridges have emerged that facilitate the bridging of tokens with native assets. To do so, these bridges utilize intermediary tokens, such as hop bridge tokens for Hop protocol and nUSD for Synapse. Liquidity providers will provide liquidity for native assets on the destination chain to give users up-front liquidity. However, there are still constraints to this bridge model. There are limits to the amount of up-front liquidity available and the intermediary asset of these bridges can also be exploited, leading to unlimited minting that would completely drain all bridge liquidity providers.

Today, USDC is the second largest stablecoin, behind USDT. Despite the fact that USDC is a centralized stablecoin, and that Circle has the ability to blacklist addresses, USDC is still widely used across nearly all blockchain networks as the predominant stablecoin. However, in some instances, users may be using wrapped versions of USDC, like USDC.e bridged from Ethereum to Avalanche through the official Avalanche bridge, instead of native USDC.

Native assets are superior to wrapped assets given that they are native to the blockchain they were minted on, meaning you can always redeem it on that specific blockchain for the underlying collateral. The trust assumption of a native token vs wrapped token shifts from a bridge’s security model to Circle as a centralized entity honoring your redemptions and ensuring that your native USDC is backed by reserves off-chain.

CCTP allows anyone to burn and mint native USDC on any supported chain, and thus will likely expand the amount of native USDC across blockchains versus wrapped versions of USDC minted from USDC locked in various bridge contracts.