Blockworks Research: How will the Cross-Chain Transfer Protocol (CCTP) change the bridging landscape?

Blockworks Research: The impact of the Cross-Chain Transfer Protocol (CCTP) on bridging.

On April 26, 2023, Circle launched the Cross-Chain Transfer Protocol (CCTP), which is a permissionless on-chain tool that facilitates the transfer of native USDC between different blockchains. Blockworks Research analyst purplepill wrote an article analyzing the impact of CCTP on the bridging landscape and bridged tokens. Here is a summary of the article’s key points.

Traditional bridging relies on locking and minting models, which have significant drawbacks, including liquidity dispersion caused by multiple versions of USDC and security risks stemming from the trust assumptions of bridges relying on minted wrapped USDC. Bridges that use intermediary tokens to facilitate bridging between tokens and native assets have emerged, but such models are still subject to early liquidity constraints.

For CCTP, the trust assumption shifts from the bridge’s security model to Circle’s redemption guarantee, and ensures that native USDC is backed by off-chain reserves. There are three main steps: USDC is destroyed by dApps on the source chain; Circle provides proof of the destruction; and signed proof allows dApps to mint USDC on the target chain.

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By sampling the Stargate, Synapse, Celer, Multichain, and Bungee bridges, the optimal bridging execution between CCTP and non-CCTP bridges with different amounts of USDC can be summarized: for small-scale transactions, non-CCTP transactions are cheaper, and users can receive more USDC. The larger the transaction size, the better CCTP performs, and the more USDC users receive.

Overall, cross-chain bridge users have a range of preferences, mainly balancing between time and execution. The primary factor competing for USDC trading volume is cost, and CCTP will stifle income from USDC bridging transactions. Currently, non-USDC bridging transactions or cross-chain swaps are not affected by CCTP. However, in the future, if bridging liquidity is more restricted by DEX liquidity or new DEX models have less impact on prices, the situation may be different.

Reference: https://twitter.com/blockworksres/status/1663577685656997888

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