LayerZero Labs and Offchain Labs Co-Design OFT Compatibility for Arbitrum Orbit Chain Bridges.

LayerZero Labs and Offchain Labs have co-designed a solution to make Omnichain Fungible Tokens (OFTs) fully compatible with Arbitrum Orbit chains. A key highlight of this development is the support for OFTs as native gas tokens on Arbitrum Orbit chains who opt-in to the solution. Notably, this marks the first time that a token standard from a third-party interoperability protocol has been recognized as a native token on any rollup stack.

As the leading L2 blockchain, Arbitrum holds approximately 40% of the market share by Total Value Locked (TVL) among all Layer-2 blockchains. Furthermore, Arbitrum Orbit, the L2 and L3 ecosystem powered by the Arbitrum Nitro tech stack, currently includes 50 chains, the most among all other blockchain tech stacks.

The adoption of the OFT standard by select Orbit chains marks a significant step towards defragmenting the crypto ecosystem and achieving universal standardization of the LayerZero protocol.

Key Terms

• Arbitrum: The leading L2 blockchain designed to enhance scalability and reduce transaction costs.
• Arbitrum Orbit: A blockchain framework that can be used to permissionlessly launch custom Layer-2 or Layer-3 chains.
• LayerZero: An omnichain interoperability protocol facilitating seamless communication for applications and tokens across blockchains.
• Omnichain Fungible Tokens (OFTs): LayerZero’s token standard that is an extension of the ERC-20 standard and can be transferred across 90+ blockchains.

Problem: Fragmentation

Previously, the Arbitrum Orbit Canonical Bridge and the OFT token bridge operated independently. This setup, while functional for most use cases, created problems for Orbit chains that used both bridges. The main issues were isolated asset supplies and liquidity imbalances, which negatively impacted the user experience.

• Asset Fragmentation: Two separate bridges result in two separate bridged versions for the same asset.
• Potential race conditions: A race condition could occur if assets entering L3 are split equally between the LayerZero bridge and the native Arbitrum<>L3 bridge, but outflows are uneven. This imbalance might lead users to favor one bridge over the other.

For instance, if 50 ETH enters through each bridge’s pool (a total of 100 ETH), and a user tries to exit 70 ETH from Arbitrum’s native bridge pool; they will only be able to exit 50 of the 70 ETH as the remaining liquidity would be in LayerZero’s bridge contract. This would result in a race condition and a suboptimal user experience as it doesn’t completely fulfil the user’s transaction.

The solution requires a more unified approach that effectively addresses the user experience issues.

Solution: Unified Liquidity

LayerZero Labs developed a bridging framework that integrates the OFT standard directly into the Arbitrum Orbit bridge contracts. This setup unifies both bridges’ OFT tokens into a shared “lockbox” contract on the Arbitrum L2 and the respective Orbit chain. Specifically, it addresses the aforementioned problems in the following ways:

• Unified liquidity: While both bridges still operate independently, the shared lockboxes merge the OFT token’s liquidity, eliminating the need for two separate bridged versions for the same asset.
• Seamless bridging: Prevents race conditions and allows for a seamless bridging experience by ensuring the amount of locked OFT supply on the L2 always equals the amount of unlocked supply on the Orbit chain and vice versa.

With this framework, users can move their OFTs between any chain, including the Orbit chain, without encountering any liquidity issues.

How it Works

The integration of LayerZero’s OFT standard with an Orbit chain’s shared “lockbox” contract allows users to send and receive OFTs between Arbitrum, Orbit L2 and L3 chains, and to the 90+ other chains connected by LayerZero.

Arbitrum < > Orbit Chain’s OFT Bridging

1. Transfer and Lock: X amount of tokens are transferred from a user’s wallet on the Arbitrum chain and locked into the Arbitrum L2 shared lockbox.
2. OFT Sends Message: Once the X amount of tokens are locked in the shared L2 lockbox, the OFT is invoked to send a message to unlock X amount of tokens on the L3 chain.
3. Arbitrum to L3 Message: The LayerZero Endpoint emits the message to the LayerZero Endpoint on the L3.
4. OFT Receives Message: The AdapterOFT on the L3 receives the message.
5. Unlock Tokens and Transfer: The AdapterOFT is invoked to unlock X amount of tokens from the supply of locked tokens on the L3.

Omnichain OFT Bridging

All OFTs can be sent to Arbitrum and its Orbit chains from any LayerZero-connected chain. The process is similar to sending OFTs from Arbitrum to an Orbit chain but uses a burn-and-unlock mechanism. The OFTs are burned on the source chain (any of the 90+ chains LayerZero supports) and then unlocked on the destination chain (an Arbitrum Orbit chain).

When sending OFTs in the reverse direction — from Arbitrum or an Orbit chain to a LayerZero-connected chain — a lock-and-mint mechanism is used. The tokens are locked in a lockbox on the source chain and minted on the receiving chain.

Token transfers amongst all other chains connected via LayerZero are facilitated through the standard burn and mint process: OFTs are burned on the sending chain and minted in the same amount on the receiving chain.

Conclusion

By integrating the OFT standard and using a shared lockbox contract, Arbitrum has improved its already user-friendly experience by unifying and expanding access to liquidity across the Orbit ecosystem. This not only solves previous inefficiencies but also unlocks new liquidity opportunities across over 90 connected blockchains.

Giving Orbit chains the ability to launch and transfer native OFTs throughout the broader crypto ecosystem is a significant step towards universal blockchain interoperability and standardization. This development sets the stage for broader adoption and integration, paving the way for a more connected blockchain ecosystem.