Are assets actually transferred when you perform a cross-chain operation?

As more and more new public chains are launched, users’ demand for cross-chain asset transfers is also growing. This trend has brought a number of cross-chain bridge projects to the forge, and the number of assets minted through various cross-chain bridges has also increased dramatically.

As cross-chain assets gain wider use, more and more questions are raised about them. For example, how do we evaluate the security of a cross-chain asset? Is USDC in some new public chains the same as USDC in Ethereum? Why do some platforms have stablecoins in different formats, such as ceUSDC, anyUSDC, madUSDC, and even USDC.e, while other platforms only have one USDC? When a cross-chain bridge is attacked, how can I determine whether the cross-chain assets I hold are affected?

With these questions in mind, this article will start from the underlying cross-chain basic logic and sort out the entire process of cross-chain asset minting so that readers can better assess the real risks of cross-chain assets and choose cross-chain tools that are more suitable for them.

Therefore, at the beginning of the article, let’s briefly discuss how assets are defined.

How to define an asset?

There are two main ways to define assets. One is to define them by physical properties, such as physical gold and precious metal currencies commonly used in ancient society. However, in modern society, whether it is currency or financial assets such as stocks and bonds, their definition methods have basically broken away from the limitations of physical properties and have been replaced by a more abstract model of defining assets through accounting books.

For example, bank deposits in our daily lives are defined by the balance sheet of a country's banking system. As long as your account balance is recorded in the bank's report, your deposit must exist.

Similar to deposits, cryptocurrencies such as Bitcoin are also defined by accounting books. The only difference is that Bitcoin uses a more centralized bookkeeping model (yes, more centralized). All Bitcoins are recorded in a unique set of books, and there is only one version in the world (longest chain consensus). This unified and tamper-proof accounting book is what we call blockchain.

The decentralization of blockchain, which is often mentioned, is actually only reflected in the wider participation of the community in the process of recording and keeping the ledgers. However, in terms of the number of ledgers involved in defining assets, blockchain is undoubtedly a more centralized and more efficient (no need for frequent reconciliation between multiple accounting entities) ledger registration method compared to the traditional bank ledger registration system.

Can assets really cross chains?

As mentioned above, each blockchain is actually an independent accounting book that can define its own native assets. But sometimes, people hope that assets can be separated from the original books that define them and flow freely in different accounting systems.

For example, cross-border remittances (across different banking system ledgers), issuing stablecoins (from bank ledgers to blockchain ledgers), or recharging trading platforms (from blockchain ledgers to trading platform ledgers), etc. All these cross-ledger asset transfer operations constitute cross-chain in a broad sense.

But the problem is that since the existence of an asset is determined by the original ledger that defines it, in theory, no asset can exist independently from the original ledger. In other words, true cross-chain asset transfer is theoretically impossible.

Just like physical gold cannot actually be deposited into your bank account, Bitcoin cannot exist independently from the blockchain that defines Bitcoin. Therefore, when people often talk about cross-chain assets, it is not the assets themselves that are cross-chain, but the value represented by the assets.

Therefore, cross-chain assets are essentially a process of value transfer across different accounting systems. However, for the sake of convenience, we will still refer to this process of value transfer across ledgers as "cross-chain assets" in the following text.

So the next question is, how can we transfer value across different accounting systems?

Two basic modes of cross-chain asset transfer

1. Locking the casting model

The locked casting model is the most basic model for cross-chain assets. As early as the era of metal currency, people used the locked casting model to lock gold in gold shops and cast and issue gold redeemable certificates (later evolved into paper money) that were easier to carry and circulate for daily transactions.

In this process, the gold shop is equivalent to a cross-chain bridge, the gold shop’s safe is equivalent to a smart contract that locks assets on the outgoing chain, and paper money is the cross-chain asset issued by the cross-chain bridge on the new chain.

Similarly, in real blockchain cross-chain activities, almost the same locking and casting logic is still used. The cross-chain bridge locks assets on the original chain and issues "redeemable certificates" of the original chain assets on the transfer chain, that is, cross-chain assets, thereby completing the cross-chain transfer of asset value.

Cross out of chain A to lock the original asset, cross into chain B to issue a redeemable certificate of the original asset

All existing cross-chain (cross-ledger) assets are basically "redeemable certificates" of original assets issued by different cross-chain intermediaries. This includes the balance you deposit into the trading platform, the US dollar foreign exchange held across borders, the Bitcoin anchored currency traded on various public chain platforms, and even the WETH received by locking ETH, etc., all belong to the broad definition of cross-chain assets.

The only drawback of this model is that the cross-chain intermediaries using this model often have difficulty meeting the user's requirements in terms of efficiency and cost. Therefore, this type of cross-chain bridge will often only link a few public chains (such as Ethereum to the new chain) in order to introduce mainstream cross-chain assets to the new chain. And this type of cross-chain bridge is often officially supported or directly developed by the new chain, so this type of bridge is often also called an official bridge.

But for ordinary users, improving cross-chain transaction efficiency and reducing costs are what they care more about. Therefore, a third-party bridge using a two-way funding pool model came into being.

2. Two-way funding pool model

The two-way fund pool model is not difficult to understand. Since the main efficiency bottleneck of the official bridge comes from the locking and casting process, as long as this mechanism can be bypassed, the efficiency of cross-chain can be greatly improved.

Therefore, these third-party bridges choose to set up funding pools on both sides of the bridge in advance, with one side collecting a large amount of original assets from the original chain, and the other side collecting cross-chain assets that have been issued by the official bridge.

When users use a third-party bridge to cross-chain, they only need to deposit the original assets on one side and directly withdraw the cross-chain assets that have been minted by the official bridge in advance on the other side, and the cross-chain work can be completed instantly. As long as the transfer-out and transfer-in amounts of this third-party bridge are roughly equal during operation, the model can operate stably.

The only limitation is that the two-way fund pool model needs to utilize cross-chain assets that have been issued by the official bridge, so it can only be deployed after the official bridge is established.

What are the factors that affect the security of cross-chain assets?

As mentioned above, cross-chain assets are redeemable certificates of original assets issued by cross-chain bridges. Each time a lock-in casting process is carried out, the risk of the asset will increase.

Let’s take anyUSDC, which is currently issued on Moonbeam, as an example. The issuance of its assets needs to go through three stages in total:

1. The US banking system issues USD;

2. Stablecoin issuer Circle locks USD and issues USDC in Ethereum;

3. The cross-chain bridge Anyswap (now Multichain) locks USDC in Ethereum and issues anyUSDC on the new chain;

Therefore, the security of anyUSDC is equal to the product of the security of these three factors, which can be expressed as follows:

Security(anyUSDC) = Security(USD) * Security(Circle) * Security(Anyswap)

In other words, any problem among these three, such as the collapse of the US banking system, Circle running away with the funds, or Anyswap being attacked, will directly affect the intrinsic value of anyUSDC. Therefore, the more locked-in casting processes an asset goes through (the more prefixes and suffixes in the name), the higher the risk it carries.

Therefore, the cross-chain bridge, as the initial issuer of cross-chain assets, has become the core node that determines the security of cross-chain assets.

At present, there are two main ways that cross-chain bridges are attacked. Taking the gold shop as an example, one is that the gold locked in the gold shop is directly stolen (the attack mode of PolyNetwork), and the other is that the redeemable certificates issued by the gold shop are forged by hackers, so that hackers can use these forged certificates to redeem the gold in the vault before others (the attack mode of Wormhole).

But in any case, the security of an asset is almost entirely determined by its issuer. For cross-chain assets, it is the cross-chain bridge that issues them that determines whether they are safe or not.

How can a new chain better issue cross-chain assets?

After supplementing the necessary knowledge, we can better understand how the chaotic cross-chain asset situation in many new public chains came about.

Let’s first look at the types of cross-chain assets included in Zenlink, the trading platform on Moonbeam.

It can be seen that in the new public chain Moonbeam, the original issuers of cross-chain assets are at least three different cross-chain bridges. Taking USDC as an example, three cross-chain assets were independently issued by three bridges: ceUSDC, anyUSDC and madUSDC.

It can be seen that Zenlink did not designate a single official bridge, but accepted all standard cross-chain assets for users to choose freely. At the same time, since no cross-chain asset has achieved an absolute advantage in Moonbeam, other third-party bridges have also begun to adopt a locked-casting model to issue their own cross-chain assets.

Although this open and free competition approach is more in line with the spirit of blockchain, it will undoubtedly cause a large degree of liquidity fragmentation problems for a newly established DEX, and the user experience is not friendly.

However, unlike Zenlink, StellaSwap and Beamswap, which are also deployed on Moonbeam, only have one type of USDC by default in their trading interfaces.

After testing, we found that the USDC is not a stablecoin directly issued by Circle. The corresponding asset behind it is actually anyUSDC displayed in Zenlink. In other words, although there is no native USDC on Moonbeam, the project team directly changed the name to a more memorable one on the front end to reduce user confusion.

Although this method unifies liquidity, the method of artificially specifying cross-chain asset standards by the project party is actually not in line with the spirit of decentralization. In particular, directly renaming anyUSDC to USDC on the front end will give users the illusion that this is directly issued by Circle, causing them to ignore the risks that Anyswap (now Multichain) cross-chain bridge may bring to user asset security.

Therefore, in the initial issuance of cross-chain assets, whether to artificially select a single cross-chain bridge as the issuing entity or allow free competition among different cross-chain assets is actually a dilemma. Just as there are various versions of Bitcoin-pegged coins in Ethereum, as long as no bridge has achieved a market monopoly in the issuance of cross-chain assets, this confusion and fragmentation will continue to exist.

But in any case, it is still a basic principle that each project party needs to maintain to keep the name of the cross-chain asset intact and not mislead users intentionally or unintentionally.

At the end of the article, let us summarize the core content of this article:

1. The cross-chain bridges built with the locked casting model are important asset issuers in the blockchain world. Similar to Tether, the company that issues USDT, they have never been simple channels, but important issuers of cross-chain assets. Once these bridges are breached, the assets they issue may instantly return to zero, so the security of these bridges is crucial.

2. The cross-chain bridge built with a two-way fund pool model does not operate a simple channel business, but a liquidity relief business. The security of its fund pool generally does not directly affect users who use the cross-chain bridge to cross chains, but the theft of the fund pool will directly cause LP to suffer losses.

3. The current confusion of cross-chain assets is largely due to the arbitrary simplification of cross-chain asset naming. In addition to StellaSwap directly changing anyUSDC to USDC on the front end, similar examples include ETH displayed in Near, which is actually simplified from nETH (n represents the official Rainbow Bridge). And ATOM obtained through different cross-chain paths in the Cosmos ecosystem is essentially not the same thing.

Therefore, don’t be simply misled by the name of the asset. Keeping an eye on the security of the issuer of cross-chain assets may become a necessary lesson for all crypto investors in the future.