Connext, the cross-chain bridging protocol, has introduced a new token standard called “xERC-20” to address the issue of losses from bridge hacks. This announcement, which was made on July 24, states that the xERC-20 standard enables token issuers to maintain a list of official bridges and control the minting of tokens by each bridge.
In addition to Connext, decentralized finance (DeFi) platform Alchemix Finance has also expressed its intention to implement xERC-20 tokens. The collaboration between Connext and Alchemix is aimed at bringing tokens such as $alUSD, $alETH, and $ALCX to platforms like Arbitrum and Optimism.
The xERC-20 token standard was initially proposed on July 7th as Ethereum Improvement Proposal (EIP) 7281. It was co-authored by Arjun Bhuptani, the founder of Connext. According to Bhuptani, this standard is designed to minimize losses from bridge hacks by holding token issuers accountable for the security of their tokens.
Under the xERC-20 standard, bridges can mint “official” or “canonical” versions of tokens with the permission of the token issuer. These permissions would be enforced through smart contracts, and token issuers would also have the ability to limit the number of coins that a particular bridge can mint. While bridges could still create their own versions of tokens, these derivative coins would not be considered “canonical”, thereby reducing their viability in the market.
The implementation of the xERC-20 standard in Connext and Alchemix comes before its official approval by EIP editors. This allows end users to benefit from the enhanced security and control immediately. The announcement emphasizes that the standard will be “forward compatible” with the official version if it is eventually approved.
Bhuptani argues that the implementation of this standard promotes competition and innovation in the bridge ecosystem, as token issuers have the flexibility to update their preferences for supported bridges over time. This approach incentivizes bridges to prioritize security and quality of service, preventing bridges with poor security measures or excessive centralization from being taken seriously.
The issue of bridge security has recently gained significant attention in the cryptocurrency community. On July 7th, over $100 million was mysteriously withdrawn from the Multichain bridging protocol, raising concerns about the vulnerability of existing bridge systems. The incident highlighted the need for stricter security measures and a shift of responsibility towards token issuers to prevent similar losses in the future.
By introducing the xERC-20 standard, Connext aims to address these concerns and provide a safer environment for DeFi users. With the collaboration of Alchemix and the potential adoption of this standard by other platforms, the crypto community can look forward to improved security and reduced risks associated with bridge hacks.