Tracking the Growth of Omnichain Fungible Tokens (OFTs)

Key Insights

• Omnichain Fungible Tokens (OFTs) are gaining traction as a multichain standard for fungible tokens.
• The unique 1:1 mint and burn properties of OFTs mitigate honeypot attack vectors while reducing resource requirements for liquidity and transfer fees.
• OFTs are positioned to bring multichain capabilities to the long-tail of application-native assets.

Token standards are specifications that define how a token should be designed and function on a specific blockchain network. These blueprints ensure that tokens are interoperable with other tokens (i.e., they can be swapped) and can be easily integrated into various dApps. Common examples include fungible token standards such as Ethereum’s ERC-20 or BNB Chain’s BEP-20 and non-fungible token standards like ERC-721.

The Omnichain Fungible Token (OFT) standard was created by LayerZero Labs to serve as a multichain standard for fungible tokens. An OFT was designed to be a catch-all fungible token standard that is compatible with the various established fungible token types across chains. An OFT is interoperable with ERC-20s, BEP-20s, fungible tokens on Aptos, and more. Almost a year after the first OFT was created with the launch of Stargate Finance’s governance token, STG, OFTs are now beginning to gain material traction across the crypto economy.

Understanding OFTs

As crypto went multichain in 2021, applications began to rely on various bridging solutions to issue wrapped assets on their behalf. While convenient in the short-term, the ability for each bridge to issue its own unique representation of an underlying asset creates non-fungibility between discrete wrapped tokens.

In a hypothetical example, if two UNI tokens were transported from Ethereum to Avalanche via Wormhole and Synapse, the two distinct wrappers used on Avalanche would break the fungibility that the UNI tokens enjoyed on Ethereum. Further, these wrapped UNI tokens would not have the same utility (voting) that their canonical Ethereum version had unless the protocol endorsed the use of a specific wrapped configuration.

OFTs present a solution to this problem by allowing any application to natively mint and burn a single, unified token standard across various chains from LayerZero’s Endpoint smart contracts. When a user requests to transfer their OFT from Chain A to Chain B, the Endpoint on Chain A burns the OFT, records the change in overall OFT supply, and creates a message request for the Endpoint on Chain B to mint the corresponding amount to the user on Chain B. This cross-chain message transfer adheres to the standards of LayerZero’s modular interoperability framework.

While this requires the application to trust an oracle-relayer pair for proper delivery, LayerZero’s design allows applications to select their trust assumptions on a per-transaction basis. In essence, LayerZero’s OFT standard allows any application to function as a bridge for its own native tokens.

The unified and extensible design of OFTs is highlighted by a few notable benefits:

• First, OFTs do not require assets to be locked on one chain before being minted on another. Instead, assets are burned on a source chain and then issued to the destination chain. This eliminates honeypots that are common attack vectors for bridge exploits.
• Next, there is no canonical version of the token — an application’s OFT deployed on Chain A is treated as having the same value as the version deployed on Chain B since both can be minted and burned at a 1:1 ratio.
• Finally, there is no need for liquidity networks common in other bridging solutions (due to the fact that assets can be minted and burned 1:1 on demand). This means that the only fees a user pays to bridge an OFT are gas fees. Transferring $10,000 worth of an OFT will cost the same amount as transferring $10,000,000 of the same OFT asset.

As Ethereum Layer-2s and other Layer-1 networks continue to gain momentum, the advantages provided by OFTs cause them to be adopted in a variety of ways across the multichain landscape.

The Growing Use of OFTs

BTC.b

The Avalanche Bridge officially added support for the Bitcoin network in June 2022. This allowed Bitcoin users to lock their BTC on the Bitcoin network and receive an ERC-20 wrapped version, BTC.b, on the Avalanche network. The security of this system requires trust in the Avalanche Bridge’s eight “Wardens”: Halborn, Avascan, Bware Labs, Ankr, Chainstack, Protofire, Blockdaemon, and Ava Labs.

In November 2022, Avalanche announced a partnership with LayerZero to upgrade BTC.b into an OFT. This transformed BTC.b from an ERC-20 token that could only be issued on Avalanche into an OFT that can be minted and burned on LayerZero-compatible networks. Following the conversion, there has been a substantial increase in BTC.b mint / burn activity as well as a steady increase in overall BTC.b supply.

With a circulating supply of just under 7,000 tokens, BTC.b is only ~4% the size of the largest synthetic Bitcoin asset, WBTC, which boasts a supply of ~170,000 tokens. There’s still plenty of work to be done for this new derivative to gain market-wide legitimacy. However, since migrating to the OFT standard, BTC.b supply has more than doubled while WBTC supply has declined ~26%. This isn’t to say that BTC.b’s growth has come at the expense of WBTC, but the relative changes in supply should continue to be monitored as BTC.b matures.

DeFi Protocols

In recent months, a growing number of DeFi protocols have upgraded or announced plans to upgrade their governance tokens to the OFT standard. A governance token with native multichain support makes sense: users would be able to interact with the protocol or vote without being confined to a single network. However, today’s governance tokens are rarely used for these designed purposes. Instead, they are primarily used to incentivize a specific action desired by the protocol (such as trading activities or liquidity provision).

For established projects that want to grow their presence on foreign chains, token incentives are crucial to penetrating any new ecosystem. In recent months, DeFi protocols such as Trader Joe (JOE), PancakeSwap (CAKE), Radiant Capital V2 (RDNT), and GMD Protocol (GMD) have signaled their shifts to the OFT standard. It’s likely only a matter of time until these protocols begin using their OFT-based governance tokens as bootstrapping incentives in their new battlegrounds.

Stargate: The Hub for OFTs

Stargate Finance is a liquidity network built on top of LayerZero. The protocol was originally designed as a bridge for stablecoins and other popular assets on LayerZero-connected chains. As OFTs gained traction, however, Stargate voted in December 2022 to add OFT tokens to its UI in exchange for a 0.02% fee on all transfers.

Before Stargate’s support, OFTs could only be bridged via unique webpages specific to each OFT. For example, CAKE and JOE could only be bridged on their respective websites. By enabling support for OFT transfers on Stargate, users gained access to a single interface that can support all OFT bridge transfers.

Applications that adopt the OFT standard are also poised to benefit from this upgrade as well. Since OFT tokens do not rely on Stargate’s liquidity network (the liquidity network is only needed for non-OFTs), applications do not need to spend resources incentivizing and maintaining liquidity on the platform. If this drives more applications to upgrade their native tokens to the OFT standard, Stargate should benefit from increased volumes and transfer fees.

Wrapping Up

Together with LayerZero, OFTs are positioned to service the long tail of native application tokens. Any application that wants multichain support for its native token can adopt the OFT standard and issue its token across any LayerZero connected chain. This means the number of supported networks will only grow for existing OFTs. In the future, the OFT standard may even be used in a similar way to Circle’s Cross-Chain Transfer Protocol for the next generation of decentralized stablecoin protocols.

OFTs will not be the end to the headaches created by crypto’s multichain economy. At the end of the day, OFTs are a standard that will require widespread adoption for the power of network effects to kick in. Moreover, OFTs carry some inherent risks: most notably, if LayerZero were to have a bug in its libraries, an application could have its token minted without recourse. Once again, it’s always good to remember that trust is an inherent characteristic of outsourced interoperability solutions.

‏Source messari.vercel.app