It seems a bridge too far for LayerZero.
Following the announcement, it would include a packaged version of Lido’s ever-popular stakes Ethereum token, the team behind the cross-chain protocol faced strong reactions from the Lido community.
The packaged version of stETH is a ERC-20 version of the original blend stETH, making it easier to reuse in other applications. Lido Finance is a popular staking protocol.
This is what LayerZero had integrated on Wednesday BNB chainthe buzzy layer-2 network Scrolling, and Avalanche.
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But why exactly this counter-reaction?
Well, first of all, they apparently didn’t ask first, thereby bypassing the board powers that oversee the proper functioning of Lido Finance.
When there is decentralized finance (DeFi) project wants to make a change to the project, it first requests approval from members of the decentralized autonomous organization (DAO) who vote for or against the change using their governance tokens. For example, Lido’s governance token is LDO.
“Honestly shocked by LayerZero’s move here,” wrote Lito Coen, Socket’s growth lead on the bridge project. “Fully leading LidoDAO’s governance process and network expansion team to implement a wstETH version for Scroll, BNB Chain and Avalanche.”
Simultaneously with the technical implementation, LayerZero actually introduced a governance proposal to approve the integration and transfer bridge ownership to LidoDAO.
However, a LidoDAO representative said this Declutter that the decentralized organization was not aware of the integration.
The strike protocol tweeted yesterday that the LayerZero “bridge is not canonical and has not been audited or approved by the Lido DAO” and advised “extreme caution” when using the bridge.
In addition to the “prominent” board, others in the Lido community pointed out security concerns surrounding LayerZero’s design.
Security issues surrounding LayerZero
LayerZero is a complicated beast, but understanding its architecture in broad terms can also clarify some of the concerns of people in the Lido community.
When the bridging protocol integrated wstETH, they essentially made it available as an Omni-chain Fungible Token (OFT). This token standard ensures that tokens from different networks can communicate with each other via LayerZero.
During token transfers, it creates a new token on the bridged side, whose supply is based on the amount of assets bridged through LayerZero.
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For example, if a user were to send one wstETH token from Ethereum to Avalanche, it is not technically the exact same token. What happens instead is that LayerZero stores the original wstETH token in a smart contract and then create an Avalanche-compatible view on the other side.
When the user decides to move that representation back to Ethereum, the LayerZero protocol destroys that representation before returning the original wstETH token.
This, in a nutshell, is what is understood as a mint-and-burn bridge. However, this mechanism is not without risks.
Hart Lambur, member of the LidoDAO community and co-founder of UMA Protocol, wrote: “This means that if this messaging layer ever becomes corrupted, there is the possibility of an unlimited supply of wstETH.”
Additionally, the security of LayerZero’s OFT-based tokens relies on LayerZero’s own validators. That is not the case with other layer 2 networks such as Arbitrum and Optimism, where wstETH has already been added to the ecosystem via a native bridge.
Independent DeFi analyst Arixon tweeted that layer 2 blockchains should provide a “confidential bridge to layer 1”; with OFT you lose this.”
DefiYaco, a business development leader at LidoDAO, agreed with Arixon’s point on the LidoDAO discussion forum, saying that “wstETH should be hit with the native bridge by default.”
He added that “using another bridge provider without strong arguments only brings more risk.”
LayerZero drops Scroll
To make up for it, the bridging protocol seems to come back to at least one integration.
A LayerZero representative said in a response to LidoDAO’s governance proposal: “we recognize the DAO’s preferences regarding native bridges and L2s,” before removing LayerZero’s wstETH token from Scroll Network.
The representative added that they “strongly agree” with the DAO regarding the preferences of both users and protocol developers for native bridges over those built by LayerZero.
Edited by Liam Kelly.