Trading

·

January 19, 2024

Bridged tokens and native tokens

Jack Filiba

Trading cross chain for a specific token is easy with Matcha but it's important to check you're getting the official token and not an imitation - unofficial tokens may not have the utility you expect!

Bridging has made it possible to move assets between chains, but also created a further layer of complexity for users and more surface area for exploits.

While most officially-issued tokens behave as you would expect them to no matter what chain they're on, these tokens can also be bridged for unofficial copies of the original. As a result, key functionality - like partaking in governance or being able to redeem your stablecoins for fiat currencies - may not be available for holders of the unofficial token. 

It is crucial to understand the differences between these officially and unofficially-issued tokens. That way, you know what you’re actually holding and can make the best decisions for your portfolio.

What are bridged tokens?

Bridged tokens refer to tokens which were created one network but have been reissued on another network by a third party. They can be acquired by sending a token native to one network to a bridging protocol which has deployed a bridged version of the token, or swapping from a token like WETH on the other network for a copy of the native token.

To understand the role of bridged tokens, it’s important to understand that tokens are constrained to the network they were created on. While each blockchain permanently stores information about its own transactions, it typically lacks access to information stored on other chains.

For instance, while it’s true that Ethereum and Arbitrum are both EVM chains, their blockchains are both configured differently. That’s where bridged tokens come into play.

Blockchain bridges attempt to close the gap between two separate blockchains. In doing so, they allow users to access value on other chains. But in cases where no official token is available on a particular chain, bridging protocols may choose to create an unofficial version that's collateralized by the official token on one of its native chains, like USDbC on Base.

Since anyone can deploy a token, you should be aware of imitation tokens which are not backed by any official supply.

How unofficial bridged tokens lose utility compared to official tokens

The process of bridging tokens works by locking your tokens in a smart contract. This is used as collateral, for which you are given new tokens on the target blockchain.

Tokens can be issued officially on multiple chains by the issuer of the original token, in which case the token you receive after bridging should preserve the original token’s functionality.

However, bridged tokens can be issued unofficially by a third-party bridging protocol. As a result, they may not have their intended functionality and may be ineligible for certain perks like airdrops.

A table comparing native tokens with bridged tokens
What you can do with bridged tokens.

There are many different types of tokens that can lose their core functions when bridged. These include, but are not limited to:

  • Stablecoins: may not be redeemable.
  • Governance tokens: may lose voting rights.
  • NFTs: may lose provenance or dynamic attributes. 
  • Tokens that represent in-game items: may lose in-game functionality.
  • Utility tokens: may lose their intended utility.

Why would you want to use a bridged token?

The decentralized landscape is made up of thousands of different projects. While this is a feature of the DeFi movement, projects being unable to communicate with one another can create a fractured and inconvenient experience for users. It can also contribute to liquidity issues, since not every asset has tokens in circulation on every blockchain.

Blockchain bridges (or cross-chain bridges) are a way to solve these issues by introducing interoperability to crypto. They can issue secondary tokens on a new chain by taking a standardized token like WETH as collateral, or issue replicas of tokens like USDC that are backed by a smart contract holding the official asset on its native chain.

Trade bridged USDC for native USDC with cross chain swaps!

Bridged tokens allow you to access value and liquidity across chains and take advantage of opportunities present beyond the Ethereum network, without needing the official project to issue a token.

However, blockchain bridges cannot ensure that the token's utility will be preserved, or that the project which issued the token will allow you to redeem assets that were bridged in this way.

Bridged stablecoins

Both native and bridged versions of several popular stablecoins exist on various chains - sometimes alongside each other - as a way to accommodate demand.

USDC is a key example of this. Native USDC tokens are issued by the company Circle, which backs the supply of USDC with a supply of real US dollars. But unofficial bridged USDC, such as USDC.e on Arbitrum or USDbC on Base, are not managed by the company. 

These bridged versions of USDC instead take USDC from a chain where it has been officially issued, lock it in a smart contract, and then issue an unofficial bridged version on their own chain. That means that in order to redeem these tokens for dollars through Circle, you would first have to bridge your tokens back to an official version of USDC. Recently, Circle has implemented a standard for bridged USDC variants for dollars, but this is a rare exception that is not common among stablecoins.

Trade millions of tokens with the deepest liquidity in DeFi

Since USDC and other stablecoins are used by traders to preserve their profits during volatile periods, a bridged token pegged to the price of USDC can be seen as an acceptable substitute. Still, even though unofficial bridged USDC may be only one transaction away from being redeemable, it introduces additional risk due to the unreliable nature of bridges and difficulty of verifying that the contract is fully collateralized. 

Bridged governance tokens

The same logic applies to other utility tokens such as governance tokens, which are used to vote on key decisions made within a decentralized autonomous organization (DAO). 

The 0x protocol, which plays a key role in token swaps for Matcha and other platforms such as Coinbase and MetaMask, has its own governance token known as ZRX. ZRX can be used to vote on project grants and protocol upgrades. 

While the ZRX token is native to Ethereum, unofficial bridged versions can be found on other chains like Polygon, Optimism, and Avalanche. Building a position in a bridged or cloned ZRX token may incorrectly give the impression that you have a stake in the governance of the protocol. In reality, holding these unofficial tokens does not actually give you voting rights.

This is because, like with many other governance tokens, voting is only available on chains which the project officially supports. As a result, in order to get utility out of your unofficial bridged ZRX, you would need to first bridge it back to Ethereum. 

How to benefit from multiple blockchain networks

Bridging is an effective way to quickly access opportunities on other chains, but bridged tokens that are not supported by the original creators may not function as you expect, and you may encounter clones that share little but a name with their official counterparts, generally rendering them worthless.

If you expect utility from any crypto you are investing in, it is important to do your research to check if the token is official. If you plan to use a bridged token instead, it’s always a good idea to look into what functionality is still available before you buy in. 

Swap tokens on Matcha

And if you want an easier way to swap across chains without dealing with bridges, you can use cross chain swaps on Matcha to trade directly for the token you want, whether that's an official stablecoin or a bridged alternative. It's also a great way to offload any unofficial bridged tokens you may be holding, so you can reduce your portfolio's risk profile.

Get an all-access pass to the wider world of crypto - use Matcha today to easily trade tokens across chains with the deep liquidity of hundreds of decentralized exchanges.

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Trading

·

December 13, 2023

Bridged tokens and native tokens

Bridged tokens and official native tokens

Trading cross chain for a specific token is easy with Matcha but it's important to check you're getting the official token and not an imitation - unofficial tokens may not have the utility you expect!

Bridging has made it possible to move assets between chains, but also created a further layer of complexity for users and more surface area for exploits.

While most officially-issued tokens behave as you would expect them to no matter what chain they're on, these tokens can also be bridged for unofficial copies of the original. As a result, key functionality - like partaking in governance or being able to redeem your stablecoins for fiat currencies - may not be available for holders of the unofficial token. 

It is crucial to understand the differences between these officially and unofficially-issued tokens. That way, you know what you’re actually holding and can make the best decisions for your portfolio.

What are bridged tokens?

Bridged tokens refer to tokens which were created one network but have been reissued on another network by a third party. They can be acquired by sending a token native to one network to a bridging protocol which has deployed a bridged version of the token, or swapping from a token like WETH on the other network for a copy of the native token.

To understand the role of bridged tokens, it’s important to understand that tokens are constrained to the network they were created on. While each blockchain permanently stores information about its own transactions, it typically lacks access to information stored on other chains.

For instance, while it’s true that Ethereum and Arbitrum are both EVM chains, their blockchains are both configured differently. That’s where bridged tokens come into play.

Blockchain bridges attempt to close the gap between two separate blockchains. In doing so, they allow users to access value on other chains. But in cases where no official token is available on a particular chain, bridging protocols may choose to create an unofficial version that's collateralized by the official token on one of its native chains, like USDbC on Base.

Since anyone can deploy a token, you should be aware of imitation tokens which are not backed by any official supply.

How unofficial bridged tokens lose utility compared to official tokens

The process of bridging tokens works by locking your tokens in a smart contract. This is used as collateral, for which you are given new tokens on the target blockchain.

Tokens can be issued officially on multiple chains by the issuer of the original token, in which case the token you receive after bridging should preserve the original token’s functionality.

However, bridged tokens can be issued unofficially by a third-party bridging protocol. As a result, they may not have their intended functionality and may be ineligible for certain perks like airdrops.

A table comparing native tokens with bridged tokens
What you can do with bridged tokens.

There are many different types of tokens that can lose their core functions when bridged. These include, but are not limited to:

  • Stablecoins: may not be redeemable.
  • Governance tokens: may lose voting rights.
  • NFTs: may lose provenance or dynamic attributes. 
  • Tokens that represent in-game items: may lose in-game functionality.
  • Utility tokens: may lose their intended utility.

Why would you want to use a bridged token?

The decentralized landscape is made up of thousands of different projects. While this is a feature of the DeFi movement, projects being unable to communicate with one another can create a fractured and inconvenient experience for users. It can also contribute to liquidity issues, since not every asset has tokens in circulation on every blockchain.

Blockchain bridges (or cross-chain bridges) are a way to solve these issues by introducing interoperability to crypto. They can issue secondary tokens on a new chain by taking a standardized token like WETH as collateral, or issue replicas of tokens like USDC that are backed by a smart contract holding the official asset on its native chain.

Trade bridged USDC for native USDC with cross chain swaps!

Bridged tokens allow you to access value and liquidity across chains and take advantage of opportunities present beyond the Ethereum network, without needing the official project to issue a token.

However, blockchain bridges cannot ensure that the token's utility will be preserved, or that the project which issued the token will allow you to redeem assets that were bridged in this way.

Bridged stablecoins

Both native and bridged versions of several popular stablecoins exist on various chains - sometimes alongside each other - as a way to accommodate demand.

USDC is a key example of this. Native USDC tokens are issued by the company Circle, which backs the supply of USDC with a supply of real US dollars. But unofficial bridged USDC, such as USDC.e on Arbitrum or USDbC on Base, are not managed by the company. 

These bridged versions of USDC instead take USDC from a chain where it has been officially issued, lock it in a smart contract, and then issue an unofficial bridged version on their own chain. That means that in order to redeem these tokens for dollars through Circle, you would first have to bridge your tokens back to an official version of USDC. Recently, Circle has implemented a standard for bridged USDC variants for dollars, but this is a rare exception that is not common among stablecoins.

Trade millions of tokens with the deepest liquidity in DeFi

Since USDC and other stablecoins are used by traders to preserve their profits during volatile periods, a bridged token pegged to the price of USDC can be seen as an acceptable substitute. Still, even though unofficial bridged USDC may be only one transaction away from being redeemable, it introduces additional risk due to the unreliable nature of bridges and difficulty of verifying that the contract is fully collateralized. 

Bridged governance tokens

The same logic applies to other utility tokens such as governance tokens, which are used to vote on key decisions made within a decentralized autonomous organization (DAO). 

The 0x protocol, which plays a key role in token swaps for Matcha and other platforms such as Coinbase and MetaMask, has its own governance token known as ZRX. ZRX can be used to vote on project grants and protocol upgrades. 

While the ZRX token is native to Ethereum, unofficial bridged versions can be found on other chains like Polygon, Optimism, and Avalanche. Building a position in a bridged or cloned ZRX token may incorrectly give the impression that you have a stake in the governance of the protocol. In reality, holding these unofficial tokens does not actually give you voting rights.

This is because, like with many other governance tokens, voting is only available on chains which the project officially supports. As a result, in order to get utility out of your unofficial bridged ZRX, you would need to first bridge it back to Ethereum. 

How to benefit from multiple blockchain networks

Bridging is an effective way to quickly access opportunities on other chains, but bridged tokens that are not supported by the original creators may not function as you expect, and you may encounter clones that share little but a name with their official counterparts, generally rendering them worthless.

If you expect utility from any crypto you are investing in, it is important to do your research to check if the token is official. If you plan to use a bridged token instead, it’s always a good idea to look into what functionality is still available before you buy in. 

Swap tokens on Matcha

And if you want an easier way to swap across chains without dealing with bridges, you can use cross chain swaps on Matcha to trade directly for the token you want, whether that's an official stablecoin or a bridged alternative. It's also a great way to offload any unofficial bridged tokens you may be holding, so you can reduce your portfolio's risk profile.

Get an all-access pass to the wider world of crypto - use Matcha today to easily trade tokens across chains with the deep liquidity of hundreds of decentralized exchanges.

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