Cross-Chain Bridge — the Future of Defi
Since the summer of 2020, public blockchains besides ethereum have grown rapidly. A number of emerging public chains (BSC, Solana, Near, Avalanche, Terra, Fantom, etc.) have been supplemented and expanded in terms of scalability, offering significantly lower fees, shorter transaction confirmation times, and some additional features. In order to attract more users in the early stage, major public blockchains attract users through high staking APY and ecological funds. Blockchain has entered an era of contention.
According to DefiLlama data, as of December 8, 2021, the amount of TVL on Ethereum still accounts for more than 65%, but BSC, Terra, Avalanche, Solana and other public blockchains have more than 10 billion capital scale, which cannot be ignored.
Multi-chain coexistence is the pattern of the current market. With the increase in the number of public blockchains as well as Layer 2 projects and the gradual improvement of their respective ecology, the demand for cross-chain of user assets will also grow rapidly. Cross-chain bridge is bound to become a rigid demand.
What is Cross-Chain Bridge
First of all, I need to make it clear that cross-chain technology is not equal to cross-chain bridge. Cross-chain technology allows data and assets to flow freely across different blockchains. Taking Polkadot as an example, data and assets on the Bifrost can interact with contracts on Acala using parallel chain cross-chain technology. But Polkadot’s parallel chains are essentially chains using a unified framework, with high interoperability and no cross-chain advantages for blockchains outside the framework. What we’re talking about here is the bridge linking different frameworks blockchain, like Polkadot and Ethereum, or Solana and BSC. To put it simply, a cross-chain bridge is a chain-to-chain bridge tool that allows the transfer of tokens and assets from one chain to another. Two blockchains can have different protocols, consensus, and governance models. And bridges provide a way to communicate and be compatible with each other to safely interoperate on both sides.
Since cross-chain bridges involve at least two blockchains (Origin and Destination), most cross-chain bridge designs include two main parts and two auxiliary parts.
Monitoring: There is usually a participating role called an Oracle, or Validator, or Relayer, that monitors the state on the origin chain.
Messaging/relaying: After the monitoring role receives an event, it needs to transfer the information from the origin chain to the destination chain.
Consensus: In some patterns, there needs to reach a consensus among all participants monitoring the origin chain before the information is relayed to the destination chain.
Signature: Participants need to individually or as part of a multiple signature to cryptographically sign the information sent to the destination chain.
According to incomplete statistics from Dmitriy Berenzon at 1KX, more than 40 popular cross-chain bridge projects in the market are summarized as follows:
According to @Eliasimos at Dune Analytics, as of November 1, 2021, there are currently 203,426 unique addresses on Ethereum that have interacted with a bridge project.
Classification of Cross-Chain Bridges
Centralized Exchange (CEX)
Before the rise of cross-chain bridges, the most primitive method for users to bridge assets between different blockchains was to rely on centralized exchanges such as Binance and Huobi. The cross-chain process in CEX only involves the change of the balance of various wallets in different blockchains. But it does not involve the burning and minting of assets. Choosing to bridge assets in this way is akin to trusting the centralised exchange behind it, but there is no guarantee that it will never go wrong.
Expternal validation can be further classified as single point and multipoint validation. There is usually one or a group of validators that monitor specific addresses on the origin chain. To bridge the assets, users send them to a specific address in the origin chain and then lock it. This information is verified by a third-party validator, which requires consensus. Once a consensus is reached, an equal amount of assets are minted on the destination chain. These validators typically use different tokens as collateral for security. The external validation technology usually takes the form of secure multi-party computing (MPC) system, predictor network, threshold signature, etc.
The typical example of a single point external validation is wBTC. Multi-point external validation is represented by Anyswap, Synapse, PolyNetwork, etc., which is similar to single-point external validation. But under the condition of asset staked and game theory, they are less likely to be “wrong” collectively, which is theoretically more reliable than single point verification. The actual effect depends on the design of the mechanism and the participants.
Native Validation (Light Clients)
Native validation, literally, is witnessed and guaranteed by validators (miners/nodes) on the origin chain, without relying on third-party validators or collateral assets. Improved asset utilization and security performance due to the elimination of third-party validators.
The biggest benefit of this model is that there is no need for trust, which is accomplished by running the original chain’s light client (smart contract) inside the destination chain’s virtual machine. Participants in a cross-chain bridge monitor messages on the origin chain and then forward monitoring records and block headers including proof of encryption to contracts on the destination chain. After validation of the recorded event, the action is performed on the destination chain. In addition, under the witness of miners on both sides of the origin and destination chain, users can not only achieve asset transfer, but also universal information transfer.
However, the disadvantages are obvious. Any deployment of such a native validation bridge between two chains requires that both origin and destination chains support smart contracts. Developers need to develop and deploy new light client smart contracts on the destination chain to verify the information of origin chain. At the same time, this kind of verification itself is executed in the smart contract of destination chain, which will also cause relatively expensive gas costs. In addition, this kind of cross-chain bridge is only suitable for point-to-point A-B chain with poor scalability. If C chain also wants to join, it needs to be developed separately.
Therefore, its deficiencies mainly lie in the high gas cost, slow speed, not easy to expand to more chains, and there will be certain restrictions in the early stage.
Projects like Cosmos’ IBC, Near’s Rainbow Bridge, Polkadot SnowBridge, LayerZero, Movr, Optics, Gravity Bridge and others are all using native validation solutions.
Local Validation (Liquidity Networks)
Local validation is also a point-to-point liquidity network. Many newly launched cross-chain bridge projects adopt this mode, such as Hop, Connext, Celer and some simple atomic exchange systems.
This point-to-point model works well for security. At the same time, the gas cost, speed and multi-chain expansion are also good. However, its main disadvantage is that it is limited in the transmission of information and cannot be generalized (only assets can be transferred, not data).
If multiple chains are connected through a liquidity network, it is possible to cross any two chains in the architecture. For example, the cross-chain protocol connects Ethereum and BSC. If it wants to connect Polygon, it can provide cross-chains between Polygon — Ethereum and Polygon — BSC by providing liquidities in Polygon, without having to build bridges for each.
This form of cross-chain bridge may lead to the creation of one or more cross-chain underlying protocols: protocols or DApps that want to provide cross-chain functionality only need to connect to these cross-chain protocols.
It is worth noting that because cross-chains are bidirectional, there may be cases where A -> B is one technology and B -> A is another. This is a hybrid model, such as Gravity, Interlay, and tBTC, which all have light clients in one direction and validators in the other.
Comparison of Cross-Chain Bridges
The core development of cross-chain bridges mainly includes the following points:
1) Security: trust and active vacation facilities, tolerance to malicious actors, security and reflexivity of user funds;
2) Speed: delay of transaction completion and guarantee of finality. There is often a trade-off between speed and safety;
3) Connectivity: select target chains for users and developers, and integrate additional target chains at different difficulty levels;
4) Capital efficiency: economic concept, including transaction costs of capital and asset transfer required to ensure system security;
5) Statefulness: Ability to transfer specific assets, more complex states and/or perform cross-chain contract calls.
Cross-chain bridges have different tradeoffs. Users with different capital scales have different considerations for capital efficiency and security. Each bridge focuses on fields with corresponding user needs. Therefore, in the future, cross-chain bridges will probably not be dominant. But more likely to be a situation of common development of multiple bridges
Cross-chain Bridge Applications
Cross-chain Bridge Aggregator
Aggregate all or mainstream cross-chain bridges and help to match the best cross-chain bridge scheme automatically according to the actual needs of users.
Suppose Alice wants to swap ETH on Ethereum to MATIC on Polygon, she has several ways to do this:
1) Bridge ETH from Ethereum to Polygon via Hop, and swap ETH to MATIC via 1inch;
2) Swap ETH to DAI via Paraswap, then bridge DAI from Ethereum to Polygon via HOP, and then swap DAI to MATIC via 1inch;
3) Swap ETH from Ethereum to MATIC via 1inch, then bridge MATIC from Ethereum to Polygon via HOP;
4) Swap ETH to USDT via 1inch, then bridge USDT from Ethereum to Polygon via HOP, and then swap USDT to MATIC via 1inch;
5) Swap ETH to USDC via 1inch, bridge USDC from Ethereum to Polygon via HOP, and then swap USDC to MATIC via 1inch.
The system automatically finds all available routes and sorts them according to three criteria: 1) the maximum output on the target chain; 2) Minimum Gas costs; 3) Minimum time.
Cross-Chain Transaction Aggregator
Cowswap can perfectly aggregate multiple single-chain transactions, and similar concepts can be used to aggregate cross-chain transactions.
Cowswap aggregated transactions example: https://etherscan.io/tx/0x755a66da5b4ea0575d9060eeddd2dde0eed19c3f9550039734b9fe5fe4c2fa11
Suppose Alice wants to transfer 100 DAI from Optimism to Arbitrum, and Bob wants to transfer 50 DAI from Arbitrum to Optimism. The cross-chain transaction aggregator can clear the DAI with each other and transfer the remaining 50 DAI from Optimism to Arbitrum.
About Moon Capital
Moon Capital is a cutting-edge investment firm focused on blockchain and cryptocurrency. Moon Capital portfolio includes, Woo Network , Infinite Launch, Litentry, Subsocial Network, Bifrost, DeepDAO and some other high-quality projects.