Issuing Multi-Chain Stablecoins using Wormhole — A Case Study

Yash Agarwal
12 min readApr 19, 2023

Reasons for plethora of stablecoin issuances in 2023–24 and how stablecoin issuers can go multi-chain using Wormhole, taking HSBC as an example!

From the UST collapse to USDT’s controversial backings to the USDC De-peg fiasco — stablecoins have been questioned and tested over time. Yet, they have managed to be rock solid at over $130 Billion Market Cap and one of the few sub-sectors in crypto, having found the Product-Market Fit. However, we are still very early, and there’s a massive opportunity to tokenize all major currencies of the world and bring them on-chain.

In the next 2–3 years, we will see a plethora of fiat-backed stablecoins, representing a market opportunity of over $1 Trillion. Here’s why:

  1. USDT and USDC control > 87% market share (~$112 billion) of the existing market share forming somewhat of a ‘Duopoly,’ hinting at an untapped opportunity for other stablecoins to grow and capture a significant market share. Consumers also need high-quality stablecoins to diversify their holdings beyond USDC and USDT.
  2. Non-USD Stablecoins: To truly realize the power of seamless cross-border remittances via blockchains and on-chain forex markets, we need more non-USD stablecoins. More than 99% of stablecoins in circulation are USD stablecoins, which is quite absurd, given the crypto market is inherently global and should represent all currencies around the world. Further, local stablecoins are needed to power local commerce use cases — a merchant in India would always want to accept payments denominated in Indian Rupees (INR).
  3. High-Interest Rate Environment: High yields on T-Bills bought from stablecoin reserves makes it a lucrative business for issuers. For instance, USDT reported a profit of $700 million in Q4 2022!!
  4. Favorable Regulatory Developments: Regulators around the world, like Singapore, Japan, and Hong Kong, are now realizing the potential of stablecoins and tokenized assets. For instance, HKMA (Hong Kong Monetary Authority) intends to regulate fiat-backed stablecoins positively and implement the stablecoin regulatory framework by 2023/24.

While we have seen web3 native organizations like USDT, and USDC issue stablecoins, the next wave of stablecoin issuance might be from Web2 organizations, including FinTechs and Banks!

However, stablecoin issuance is not a cakewalk, with multiple functions like governance, stabilization (reserve management), and the most tricky, ‘multi-chain issuance.’

Stablecoins and Multi-chain:

Unlike native assets like ETH or SOL, which are native to their blockchain, stablecoins want to be multi-chain, serving as both the “medium of exchange” and “store of value” for maximum chains. Here’s why stablecoins want to be multi-chain from Day 1:

  1. Users: Contrary to the common notion, Ethereum is not the #1 chain in terms of the number of addresses, and for a stablecoin, it’s crucial to attract the most users by tapping maximum chains. For instance, USDC has 1.67 million holders on Ethereum, while Solana has 1.46 million holders, depicting that L1s, like Solana, are equally important for USDC!
  2. Capital and Liquidity: While Ethereum is still the most dominant chain, its TVL share fell from ~96% in 2021 to ~59% in March 2023 — with the rise of L1s, L2s, and now L3s! For instance, Tron has the most USDT issuance (~$44 Billion), even higher than Ethereum (~$34 Billion)!

Cross-chain UST: Learnings: UST was once the third-largest stablecoin with a peak market cap of $18 billion+ before crashing in May 2022. One of the primary reasons for its astronomical growth — UST was available on most blockchains like Ethereum, Cosmos, Polkadot, and Solana and heavily marketed and incentivized, despite UST being a native algorithm stablecoin for the Terra ecosystem.

Not just stablecoins, Multi-chain is now a key strategy in helping any projects tap into greater distribution. For instance, Chingari, one of the biggest social networks on Solana, is now Multi-chain and expanding to Aptos as well!

What’s Wormhole, and How Does it Work?

Wormhole is an interoperability protocol that allows projects to build on top of its generic message-passing layer. Think of Wormhole as a communication layer between isolated blockchains or bridges between islands (blockchains). It has two major components:

  1. Asset Bridge: Facilitates the flow of capital (tokens) across blockchains [xAssets]
  2. General Messaging: Facilitates the flow of Information (message) across blockchains [data]

Wormhole has facilitated over $35 billion in volumes and over 325 Million messages! To top it up, Wormhole is fully backed by Jump Crypto, one of the most ambitious and well-funded funds in the crypto space!

Here’s how wormhole messaging works: Wormhole emits messages from one chain to another, observed and verified by a Guardian network of nodes (think of them as validators). After verification, this message is submitted to the target chain for processing.

This simple message-passing primitive enables xChain functionality. Users interact with xDapps (xChain decentralized applications) to transfer xAssets (cross-chain assets) between networks or access their xData (xChain data) to provide them services on their current network.

What are the xAssets?

ETH only exists on Ethereum, MATIC only exists on Polygon, and SOL only exists on Solana — solving for this limitation and enabling these native assets to move across blockchains, xAsset standards, or simply cross-chain assets were created. An xAsset is “chain and path agnostic” — it retains fungibility regardless of which blockchain it travels.

The best part of xAssets are: All tokens are only backed by the origin asset, allowing assets to be transferred in a path-independent fashion. This eliminates the possibility of a ‘double-wrapped’ asset for a single backing asset, regardless of what chain the assets are passed to.

Wormhole has already enabled multiple tokens to go cross-chain using xAssets:

  1. SWEAT Token: SWEAT, a move-to-earn token, started as a token on NEAR blockchain, but using wormhole’s xAsset standard, it was bought to Ethereum as well.
  2. BONK: The famous dogecoin on Solana is now available on other chains like Polygon, Ethereum, Aribitrum, and BNB chain — all thanks to xAsset.

Some of the other notable wrapped assets are: $HXRO with ~$47 Million (wrapped from Ethereum to Solana) and $AUDIO with ~$6 Million (wrapped from Ethereum to Solana)

What is xdata?

Similar to xAsset, it exists in its layer independent of any blockchain, which makes xData accessible by all blockchains. The difference is that xData represents arbitrary data rather than the token information represented by an xAsset. Cross-chain interoperability becomes a matter of creating, consuming, and managing xData.

Now that we are convinced that Multi-chain is the future and stablecoins should leverage cross-chain protocols like Wormhole for maximum liquidity and users. Let’s understand how exactly they can leverage Wormhole and issue multi-chain stablecoins.👇🚀

To make it more practical and fun, let’s understand it with a case study:

Suppose Hong-Kong based subsidiary of HSBC — one of the largest banks in the world, wants to issue its own regulated stablecoin, HKDC (Hong Kong Dollars Coin). They want to issue on a public blockhain like Solana, which will be backed by:

80% — T-Bills by the Hong Kong Government with 3% annual risk-free yield.

5% — Cash held at their own bank for liquidity buffers.

15% — Commercial Loans, lent by them earning 6–7% annual yield.

How HKDC will look in the HSBC App (Props to Sitesh for designing this!)

Just like Circle, HSBC will also ‘Mint’ and ‘Burn’ HKDC and has full authority over the supply of HKDC. The motive for HSBC will be simple — to get maximum adoption of HKDC: More Market Cap enables → More revenue via yields from reserve assets. More users enable → to build an ecosystem around HKDC.

And for more users and capital, what’s the best strategy? Multi-chain from Day 1!!

There are two ways in which they can issue:

  1. Bridged/Wrapped Stablecoins using ‘xAssets’
  2. Native Issuance using ‘xData’

Bridged Stablecoins [Lock and Mint Mechanism]:

The most simple multi-chain integration setup for stablecoins currently deployed on a single chain like Ethereum is to turn them into xAssets through a canonical minting mechanism. It simply implies locking the stablecoin on the source chain and minting the stablecoin on the destination chain.

The way HKDC (HSBC’s stablecoin) will work is as follows:

  1. The HKDC will be minted ‘natively’ on only one chain like Solana as SPL Token. Think of this as the main token. This will be fully guaranteed and redeemable 1:1 by HSBC directly.
    But they want to Multichain, right? Here’s where Wormhole’s xAssets kicks in.
  2. For Multi-chain Issuance: Wormhole will create a token contract on all the desired destination chains (20+ supported chains), which will serve as the bridged token. When users bridge their token from the source chain (Solana) to any destination chain (Polygon), the original token is locked in Wormhole’s bridge smart contract. The wormhole messaging protocol then transmits a cross-chain message instructing the target chain to mint the destination chain token via “Attestation.” This newly minted HKDC is distributed to the user’s wallet address on the target chain. So, if the token is bridged to Polygon, it may be called pHKDC or, simply, ‘HKDC on Polygon’ for greater user trust and simplicity.
  3. For Redemption: When users want to redeem the bridged HKDC on the destination chain (Polygon) for their original HKDC, they initiate a transaction in the opposite direction. The bridged asset is burned on the destination chain. The network then passes a cross-chain message back to the original chain (Solana) and confirms that the destination chain transaction is valid. The HKDC is unlocked for the user on Solana.
  4. Liquidity of Bridged Stablecoins: Maintaining liquidity is crucial for any assets to ensure better price execution for users.
  • DEXs: For a user on Polygon, they can simply buy or sell HKDC at Decentralised Exchanges like Uniswap. The more liquidity of the AMM pools, the better the execution prices → Seeding initial liquidity and Liquidity Mining (LM) incentives will be crucial for launch.
  • Pegging: Since Polygon HKDC are always mintable and redeemable against Solana HKDC, the arbitrageurs can always redeem HKDC via Wormhole when the price of HKDC is lower than the peg or simply mint HKDC via Wormhole when the price is higher.

The circulating supply of HKDC remains constant because the total number of HKDC can always be calculated by taking the number of circulating HKDC and all of the tokens in the Wormhole’s bridging contract on the source chain.

Existing Bridged stablecoins:

Bridged stablecoins are not new; they are already used widely:

  1. Polygon USDC [Blockchain Bridges]: Polygon USDC is not natively issued by Circle. However, it’s bridged from Ethereum via Polygon PoS Bridge and has ~$700 million USDC in circulation and is considered equivalent to USDC. Another prominent bridged USDC is Arbitrum USDC, which has $1.3 billion in circulation.
  2. Aptos USDC [Wormhole]: Interestingly, Aptos being a newer chain, doesn’t have any major native assets except APT, and the top assets are bridged USDC and USDT by Wormhole :
  • USDC ~ $18 Million [Bridged from Ethereum and Solana]
  • USDT ~ $7 Million [Bridged from Ethereum]

Besides them, Wormhole offers numerous other bridged stablecoins in other chains.

Pros of Bridged Stablecoins: Faster to Market and Less Resource Intensive — Bridged stablecoins enable issuers to launch multiple chains natively without deploying smart contracts on each chain. This reduces the time to launch stablecoins and requires far lesser resources (cost and effort).

Cons: While bridged assets are an excellent solution to go multi-chain, it has a few drawbacks:

  1. Fragmented Liquidity: For instance, estimates suggest around 100 different bridged USDC assets currently exist across the Cosmos landscape, each issued by different bridges.
  2. Bridging Risks: Since the issuer does not natively issue these, it’s adding another layer of minor risks (like custody risks).

Native Issuance using Cross-chain messaging [Mint and Burn Mechanism]

A more seamless and elegant solution, with far lesser risks, would be to issue native assets on each chain, which leverage wormhole. In this setup, HSBC will deploy its smart contracts in each chain, which will include the logic for issuing, redeeming, and transferring stablecoins. The off-chain reserves will be unified, while the stablecoins will be distributed across chains.

Case study: Exploring Circle’s CCTP

One of the best examples of a stablecoin leveraging the “Mint and Burn” mechanism is Circle’s Cross Chain Transfer Protocol (CCTP), which simplifies the flow of liquidity and improves the UX and DX by enabling USDC transfers natively across chains, i.e., without locking it on one chain and minting a wrapped version on the other — the way it works on wormhole right now.

Here’s how CCTP works:

  • Burn USDC on the source chain: A user accesses an app or wallet to initiate a transfer of USDC from one blockchain to another and specifies the recipient wallet address on the destination chain. The app facilitates a burn of the specified amount of USDC on the source chain.
  • Fetch signed attestation from Circle: Circle observes and attests to the burn event on the source chain. The app requests the attestation from Circle, which provides authorization to mint the specified amount of USDC on the destination chain.
  • Mint USDC on the destination chain: The app uses the attestation to trigger the minting of USDC. The specified amount of USDC is minted on the destination chain and sent to the recipient wallet address.”

For a fact, the Native USDC will also be leveraging Wormhole!

Similarly, HSDC can leverage Wormhole’s general messaging for sending attestation across the chain as a message. Those contracts verify that HKDC has been burnt on the source chain by fetching a signed attestation from HSBC’s automated attestation service. Wormhole contracts can then provide authorization to execute the minting of USDC on the destination chain. Further, The Wormhole relayer network enables transferring messages without having to pay gas fees on the target chain.

Pros: Higher Liquidity and Larger Ticket Sizes:

All existing liquidity pools are now unified — ensuring deep liquidity for users on all supported chains. Unlike bridged stablecoins, where there should be enough stablecoins from the chain, it is bridged from; native issuance makes it possible for stablecoins issuers to mint virtually unlimited amounts of stablecoins on the destination chain. Further, they are more capital efficient and will have the lowest possible cost for bridging.

Cons: Takes higher time and effort:

Since this involves deploying contracts on each chain natively and tapping 20+ chains can take much longer.

What can be built: RFPs for Builders

  1. Low-code Tooling:
  • Build a low-code tool to enable stablecoin issuers to launch a stablecoin on one chain like Solana and simultaneously deploy the bridged version of stablecoins on multiple chains of their choice using Wormhole’s xAssets.
  • Enable stablecoin issuers to build their own version of the native bridge, like Circle’s CCTP, using Wormhole’s general messaging.

2. Omni-chain Standards and Wallets: Imagine you have a HKDC wallet, which is an omni-chain; you can use it across any chain, like Ethereum, Solana, and Polygon, without worrying about bridging and leaving the wallet interface. A user is abstracted away from all the complexities of bridging, giving a chain-agnostic experience for stablecoins.

You can find more RFPs written by me on Superteam xgrants.

Closing Thoughts:

Multi-chain Stablecoin issuance, which is fully backed 1:1, particularly by larger institutions, represents a unique opportunity for both businesses as well as users. It will be interesting to see how this trillion-dollar opportunity shapes up and who ends up building “picks and shovels” for this gold rush!

Cheers for taking out the time to read this.

Feel free to contact me at Yash (@yashhsm on Telegram/Twitter) for any suggestions or if you have any opinions. If you find this even slightly insightful, please share — it justifies my weeks of effort and gets more eyeballs :)

Thanks to SuperteamDAO and Wormhole team for the opportunity!

Disclaimer: This essay is completely my personal perspective and in no way represents any organization we might be associated with. HSBC was just used for representation purposes!

References:

  1. Wormhole xDapp Book
  2. Wormhole stats
  3. Wormhole Deep-dive by Superteam

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Yash Agarwal

Building & Writing in FinTech & Web3 | @yashhsm on Twitter