When bridges gamble with users’ assets, the promise of neutrality collapses into chaos. By definition, bridges serve as neutral infrastructure that enable the transfer of liquidity for a token from one blockchain to another. However, when lock-and-mint bridges attempt to invest the collateral on the originating chain into leveraged DeFi strategies, the bridged token on the destination chain no longer retains the same properties and economic guarantees as the original token on the source chain.
For fully fiat-backed stablecoins like USDC, redemption guarantees are upheld because issuers hold high-quality, liquid assets such as U.S. Treasury bills, along with deep liquidity and access to the banking system. If a bridge invests the collateral into lending protocols, the bridged asset on the new chain becomes fractionalized and loses its full fiat backing. This means users would perceive the bridged token as distinct from the original, and its market value would reflect the fractionalized and rehypothecated nature of its collateral. As a result, the bridged asset would lose fungibility with the original token.
The key characteristic of fully reserved fiat-backed stablecoins is the issuer’s commitment to holding high-quality, fully reserved assets. This commitment is enforced through regular audits and regulatory compliance in jurisdictions with stablecoin regulations. By limiting the issuer’s discretion in choosing collateral assets, the risks of principal-agent problems are avoided. The proposal to invest bridge collateral reintroduces the principal-agent risks that plague banking and centralized discretionary investment managers. Worse yet, unlike traditional finance, there is no central bank backstop to rescue the system in the event of a liquidity crisis. This makes such a program even riskier and more centralized than traditional banking as a single team would determine the risk profile of the collateral investment portfolio and liquidity on the destination chain. This would make a shaky ground for building future financial applications.