When launching tokens, onchain projects, and indices, the infrastructure and security model of the underlying smart contract may sometimes be overlooked. But if it were to somehow fail, this could have disastrous consequences for the product as a whole—and its users.
Understanding the underlying custodial and security models is an important consideration for everyone in the ecosystem—from launching a new project to simply interacting with tokens.
Minting, Burning, Pausing, and Other Features
Many tokens have powerful functionality that can affect their behavior. Minting functionality is common, and index tokens or pegged assets often also enable burning.
Managing control of these features is incredibly important. In a worst-case scenario, an attacker who is able to mint 10 times the supply of a token has the potential to destroy its value in one fell swoop. In the wrong hands, minting can wreak havoc on a token’s system, but burning, pausing, or other features can also be vulnerable—if used improperly, they can make it impossible to use a token.
That’s why the number one priority for creating a new token or project is to secure these features—and why users should understand the security functionalities of tokens they’re considering.
Usually, projects have two main options: deploy a custodial model or implement a trustless system that operates automatically through the code in a token’s smart contracts.
Custodial vs. Trustless
At their foundation, the custodial and trustless systems differ in that one is more decentralized than the other. However, after years of code vulnerabilities and exposures, decentralized options may not be the best choice for everyone.
21BTC—and other wrapped tokens by 21.co—utilize the custodial model. Rob Hoffman, Director of Product at 21.co, explains, “The underlying assets are held by a third-party custodian. If there was a contract exploit on-chain where the products exist, the underlyings aren’t impacted because of the custodial model. It’s one of the highest security models available—but also the most expensive.” Hoffman goes on to explain the process, “In this model, you send the assets to the custodian. After verifying that the assets are held as collateral, you mint the representation of the asset on the destination chain—in this case, Solana.” This process makes it possible for 21BTC to exist as a native Solana token, while tracking the underlying BTC.
In a trustless model, only smart contracts can call privileged functions like minting and burning: the token's code dictates everything it needs to do. In this model, cross-chain liquidity is mainly achieved via programmatic bridging. This works well for a lot of people and specific use cases—it’s simple, lightweight, fast, cheap, and automatic. For quick trade transactions, it makes a lot of sense. However, it may be less ideal for longer-term holdings, large transactions, or other circumstances. Bugs or vulnerabilities in the contract’s code may pose a threat, leading to billions of dollars in hacks.
Each model has value, but they must be carefully considered for their benefits and particular use cases.
Environments: Where is Your Token Held?
Beyond the security model of the token itself, its environment and dependencies can also become points of failure. The blockchain that hosts the token is a crucial component of its security. Building a token on a potentially unsafe blockchain is equivalent to building a skyscraper on a foundation of sand.
Blockchain failures are rare, but newer technologies may carry additional risks. For example, hosting a token directly on Solana is one of the safer approaches. However, risks still exist, such as a botched network upgrade, attacks on the consensus, or vulnerabilities in the underlying smart contract virtual machine. The market considers these risks fairly low, translating into more activity.
Alternative solutions like layer 2s or new node networks offer speed and low costs but have their own tradeoffs. Due to their relative lack of maturity, they’re generally quite centralized—a single entity or select number of nodes may be responsible for creating blocks and ensuring their validity. They may experience more downtime than larger chains, and their security models may rely on a trusted multisig model for certain key features behind the scenes.
Don’t Reinvent the Wheel
Handling all the potential risks alone can be difficult, especially for smaller organizations. Choosing reliable partners to set up a token’s infrastructure allows projects to benefit from their expertise at a fraction of the cost required to reimplement the same reliable processes. It can also help with other steps of the process, such as generating liquidity or initial visibility and trust.
Nonetheless, being aware of your product's security model helps you manage risks effectively and prevent costly mistakes.
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities or any other regulated products in any jurisdiction. 21.co Wrapped Tokens are not available in certain jurisdictions, including the United States. Some of the information published herein may contain forward-looking statements and readers are cautioned that any such forward looking statements are not guarantees of future performance, involve risks and uncertainties, and actual results may differ. Additionally, there is no guarantee as to the accuracy, completeness, timeliness or availability of the information provided and 21.co and its affiliated entities are not responsible for any errors or omissions. The information contained herein may not be considered as economic, legal, tax or other advice and viewers are cautioned not to base investment or any other decisions on the content hereof.
