Chaindrop

🧑‍🌾 EthXY

Given the success and popularity of custom native token chains like Degen and Ham, and our collaboration with /ethxy, we've been getting a lot of questions about about how chains using custom native tokens work. Understanding the operational implications and the numerous nuances is difficult and requires a lot of research... so we thought we'd save you the work.

With that in mind, let's look at:

	1.	Why you might use a custom native token
	2.	How custom native tokens work
	3.	How rollups support them and what they require
	4.	Differences in how they are implemented by rollups

Without further ado...

co-founder @chaindrop § software engineer § privacy wonk § music head § theoretical memeticist

How do custom native tokens work?

TL;DR: Every rollup must have contracts on the main chain it rolls up to. These contracts can be set to accept a specific token from a specific address as the rollup’s native currency. After confirming the token deposit, they issue the equivalent amount as native currency on the rollup.

The subtlety this glosses over is that the rollup chain itself continues to work as usual. Its native currency remains its native currency, only differing in name and symbol. Most necessary changes happen on the parent chain, with strict controls around deposits and withdrawals of the new native token. The rollup only accepts its designated native currency for deposits, ignoring the parent chain’s native currency.

Support for custom native tokens

Currently, only two rollup stacks support custom native tokens: Optimism’s OP Stack and Arbitrum’s Orbit. They share several key characteristics and restrictions for ERC20 tokens used as custom native tokens:

	•	Native to Parent Chain: Tokens must be deployed natively on the parent chain.
	•	Irreversibility: The token cannot be changed after chain deployment.
	•	No Rebasing: Tokens must not be rebasing, ensuring predictable escrowing for deposits.
	•	No Transfer Fees: Tokens cannot have transfer fees, as transaction fees must be predictable and calculable beforehand.
	•	18 Decimals: Tokens must have 18 decimals of precision, consistent with Ethereum’s own native currency.

Both platforms require careful configuration of fees during deployment to reflect the token’s value relative to ETH. While neither has built-in mechanisms for dynamic fee adjustments to track market fluctuations, both can set fee values post-launch to facilitate tracking exchange rates.

Differences in custom gas token support

Arbitrum Orbit:

	•	Chains using custom gas tokens in Arbitrum Orbit must utilize their AnyTrust Data Availability (DA) solution instead of standard Ethereum data availability guarantees.

OP Stack:

	•	A custom gas token in OP Stack must have both its name and symbol within a 32-byte limit. This requirement is generally non-restrictive, as 32 bytes provide ample length for token names and symbols.

For most chain operators, these differences should be insignificant. The decision on which stack to use will likely depend on other factors, such as the type of applications they want their network to support, the ecosystem of the chains they will roll up to, and the specific characteristics and capabilities of each stack.

Conclusion

Hopefully, I’ve made things a bit clearer on why you might want to use custom gas tokens and how they work at a high level. I’m always happy to dig deeper into the details and would love to elaborate on anything you still have questions on. Feel free to follow up in the replies!

If you still have questions about what ecosystem or stack might work best for your project, let’s chat! Both myself and the whole team here at /chaindrop are always happy to dig into the details of your project with you and help guide you in as objective a manner as possible. We pride ourselves on helping you find the best fit

Why use a custom native token?

If you’re still reading, you’ve probably already spent some time thinking about this and have your own list of reasons. Here’s a brief overview of the most common motivations that others find compelling to consider launching chains with custom native tokens:

	•	Subsidized Gas Fees: Chain operators can enhance accessibility and user engagement by subsidizing transaction costs, absorbing some or all of the gas fees, or dynamically adjusting the fee structure.
	•	Enhanced User Experience: Utilizing the project’s own token for transaction fees streamlines interactions, especially when most activities on the chain involve this token.
	•	Token Utility: Deploying a custom native token can increase its utility, potentially elevating the token’s value and its significance within the ecosystem.
	•	Innovative Economic Models: Utilizing a custom token enables the creation of novel economic models, offering opportunities that standard configurations do not.