Cross-chain demand under the DeFi boom

With the DeFi boom comes a surge in cross-chain demand. The current DeFi cross-chain product types are eco-type, cross-chain bridge type and multi-chain aggregation type, each of which has its own advantages and disadvantages.

Cross-chain demand under the DeFi boom

Author: unicorn

DeFi explosion and Ether congestion are well known, and a large number of Dapps have landed on latecomer public chains with higher performance features, and even some head projects are planning to migrate: the current public chain ecology has gradually evolved from the exclusive monopoly of Bitcoin and Ether to Ethereum, Huobi Eco Chain, Binance Smart Chain, etc. Oligopoly, and there are constantly new excellent ecologies emerging and rapidly rising, such as Polygon, Solana, etc. Take the data on DeFi Llama (defillama.com) as an example, the locked volume of DeFi on Ether is close to USD 100 billion, and the total locked volume on BSC, Solana and Polygon is more than USD 35 billion.

Since smart chains like BSC can provide users with faster services and lower Gas fees, it is natural for applicants to prioritize or migrate some tasks to smart chains other than Ether; however, after a series of flows, eventually many will still return the value results to the current center of the universe-Ethernet, after all, assets need to be in a more pervasive application environment Each public chain has its own positioning and development direction, and users expect Ether and each ecology to meet different functional needs; in order to prosper together, the ecological chains need not compete with each other for users and universal projects, but cooperate with each other to meet the needs of users in different aspects.

Such a shift in user behavior has created a demand for cross-chain market – users increasingly do not interact with all assets in one chain, but choose better products and chains to fulfill different functional needs according to the characteristics of each chain and the distribution of different functional applications. In terms of the current situation, the deployment of product distribution scatter has been gradually completed, and what is more needed is to break the barriers between points. However, the exclusivity of the public chain system determines that it is difficult for users to complete asset integration and transactions on multiple chains independently, and each chain is an independent economy with different ledgers, protocols and technical solutions.

The “demand” here can be understood from two aspects.

Users need to maximize the use of their assets and participate in financial activities on different chains, while minimizing cross-chain costs and improving capital utilization.

For developers, cross-chain can realize the linkage with other assets to maximize the value and make more novel ways of playing possible. In addition, cross-chain can enable projects to attract users from other chains, increasing the exposure and depth of the project’s capital pool. Especially for projects on emerging chains, main chain congestion is often positively correlated with on-chain prosperity, so project owners need to consider bringing in users such as those from the ethereum ecosystem to increase more liquidity while bringing smooth and convenient access for users.

In terms of implementation level, cross-chain refers to the exchange or transfer of assets between different chains (either exchange CAKE on BSC for UNI and then interact on Ether; or map CAKE to Ether for direct use). At first glance, it seems simple, just a conversion of space, but the logic to achieve interoperability for public chains in a fragmented state is very complex: first, how to establish consensus to be able to access off-chain information and verify it (because any data cannot be fully trusted in the absence of consensus); second, how to maintain a high degree of decentralization to ensure the transparency and correctness of the data verification process.

Types of decentralized cross-chain technologies and products
Currently, blockchain players are still in the primary exploration stage of cross-chain, and are studying different ways to play and implement. According to the types of technologies, they can be divided into the following three types: notary schemes, sidechain or relay forms, and cryptographic forms such as hash locking.

Notary schemes, which is to introduce one or more intermediaries to undertake the work of data collection, transaction confirmation and verification on two chains with signature, and the assets will be unlocked and sent only if the signature is received, so as to realize the trust consensus and data mutual recognition between chains.

Relay technology, which refers to inserting a data structure recognized by both parties in the middle of two chains, plays the role of a relay and serves as a bridge for data communication between the two parties. The relay acts as a data collection and transmission between the chains, and the data receiving chain can verify the transaction status on the sending chain by itself after getting the data from the sending chain, without relying on a trusted third-party notary.

Hash TimeLock Contract is a smart contract with pre-set trigger conditions (hash lock + time lock), and the correct hash value is presented within a certain period of time to unlock the asset, so as to achieve the purpose of cross-chain exchange.

The above three cross-chain technologies have their own shortcomings, for example, the notary increases the threat of centralization, the relay is technically difficult to achieve, and the hash has the limitation of application scenarios (only the mutual exchange of assets across chains, but not the transfer of assets), so it can be seen that there is no perfect solution for cross-chain yet; however, this does not affect the players’ enthusiasm and exploration of cross-chain play, and many projects worth learning and attention have been created However, this does not affect players’ enthusiasm and exploration of cross-chain gameplay, and has created many projects worth learning from and following. In general, according to the application scenario and business purpose, the current projects can be divided into the following three categories: ecological type, cross-chain bridge type, and multi-chain aggregation type.

Ecological type
The current representative projects are Polkadot and Cosmos, which provide a new underlying architecture that allows all the other chains accessed to complete data interaction well and provide the basis for cross-chain interaction for applications within the ecology.

Polkadot Polka: Created by Gavin Wood, one of the founders of Ether, it adopts a heterogeneous sharding structure to create a new ecology in which data and assets on different parallel chains (Parachain, which need to be based on the same consensus and access to Polkadot network) can be exchanged through Relaychain without Additional compatibility operations are not required. However, there is a cost to access, and project owners need to bid for the right to use the parallel chain and lock a certain number of DOTs (native tokens in the Polkadot network) in order to use the slot of the parallel chain to achieve “cross-chain” (here, cross-chain refers to the parallel chain under Polkadot). Polkadot is designed to address the non-scalability and isolation of blockchain networks, but limits cross-chaining to its own ecosystem and is not free for everyone.

Cosmos: Created by Jae, the inventor of the Byzantine consensus engine Tendermint, Cosmos is a decentralized network of multiple independent parallel blockchains using the BFT consensus algorithm. Its structure is similar to Polkadot, with a relay model, in which Hubs (similar to Polkadot’s relay chains) “sort” and “send” cross-chain “orders” from each chain (called Zones, similar to Polkadot’s parallel chains) under the Cosmos ecosystem. ” and “send”. Functionally, Cosmos focuses on asset transfer rather than the larger cross-chain messaging; however, Cosmos is more open than Polkadot, and the applications that access it have more freedom to customize or adapt.

The risk of such ecological cross-chain projects lies in the uncertainty of the number and quality of projects that will be connected to the ecology. Project parties (including existing public chains) have absolute initiative to decide whether to accept their cross-chain protocols or not. An ecology without applications is just an empty shell.

Types of cross-chain bridges
A cross-chain bridge provides a compatible channel between two public chains with different protocols and rules, allowing one chain to access transactions occurring on the other chain through a prophecy function. The essence of a cross-chain bridge is to circulate the same asset on both chains, and when a cross-chain occurs, a new asset is minted on one chain while the same token is destroyed from the other chain to achieve a cross-chain balance.

Currently, cross-chain bridges mainly operate in the form of asset mapping. For example, a cross-chain bridge deploys cross-chain smart contracts on BSC and ETH, and a user who wants to implement the transfer of UNI tokens in ETH to the BSC chain internally consists of the following steps.

a. The user initiates a top-up to the smart contract deployed on ETH in the cross-chain bridge and locks UNI

b. The smart contract sends the information to the smart contract on the BSC chain deployed on the cross-chain bridge based on the status change of the user’s account

c. The smart contract on BSC receives the information and generates the corresponding number of UNI-BEP20 on BSC (BEP20 is the token standard on the CoinA chain)

d. Users get mapped assets on BSC and use them

The advantage of this type of cross-chain project is that it provides a simple way to cross-chain while maintaining the decentralized feature. For users, it satisfies the cross-chain demand and most cross-chain bridges can maintain a very low fee and friendly experience; for developers, the implementation logic of cross-chain bridges is relatively simple, so most current cross-chain projects are implemented in the cross-chain bridge mode, and the representative projects are

Anyswap: It had received investment from Coinan, and the current supported public chains are: ETH, BSC, Fantom, HECO, Fusion, xDAI and Polygon, with a total transaction volume of over $10 billion.

Chainswap: Launched by AntiMatter, it has received $3 million in strategic financing; as a cross-chain asset bridge, it currently has access to 5 public chains (ETH, BSC, HECO, OKEx, Polygon) and supports the exchange between 61 currencies; the total transaction volume has exceeded $100 million.

Multi-chain aggregation type
If the core of cross-chain bridge is the mapping of assets, then multi-chain aggregation, as the name suggests, is to centralize the flow of assets on different chains and build cross-chain transaction pools to realize cross-chain transactions of assets for users, not only limited to cross-chain bridge asset transfers. Different multi-chain aggregation projects implement slightly different paths. Taking O3 Swap as an example, if a user wants to exchange CAKE on BSC to MDX on HECO, the path is

a. User initiates an exchange request to O3 Swap

b. O3 Swap exchanges CAKE for BUSD, a stable coin on BSC

c. BUSD is exchanged for HUSD on HECO through a cross-chain pool (pool storing stablecoins from different chains)

d. On the HECO chain, HUSD is exchanged for the target MDX

e. The user receives the MDX in the HECO wallet

Another implementation path for multi-chain aggregation is to introduce an intermediate token as a bridge for cross-chain assets, where the intermediate token replaces the transit function of stablecoins on different chains as mentioned above, for example, the cross-chain implementation path for THORChain is

a. Users initiate exchange requests to Thorchain

b. Thorchain exchanges the CAKE for the equivalent RUNE (THORChain’s native token) in its own CAKE-RUNE transaction pair

c. Thorchain exchanges the RUNE for the equivalent MDX in its own MDX- RUNE pair

d. The user receives the MDX

In this case, steps 2 to 4 in the O3 Swap example, and steps 2 to 3 in THORChain are run in the background, without the user having to do anything manually. Thus, the user completes the process of exchanging coins on one chain for native assets on another chain. Of course, multi-chain aggregation is just an idea, and the specific exchange process can exist in different forms, and there are currently many teams exploring more efficient intermediate paths to provide a better cross-chain experience for users. In addition, based on multi-chain aggregation, various current DeFi applications on single chains can realize cross-chain experience (e.g., users can pledge idle UNI in exchange for BUSD to mine on BSC), which achieves interoperability of assets on different chains at the application level and breaks data silos in a real sense.

Future Development
2020 is the outbreak of DeFi, but it is only the beginning, there is still huge potential and infinite application scenarios in the future, which will inevitably drive a larger cross-chain demand. For the latter, it is certain that the goal of each player is the same, that is, to open up the ecology of each chain and truly realize the open finance with seamless interoperability among chains; the exploration of each realization path can also give rise to the collision between different projects, and jointly drive the development of this emerging segmentation demand in mutual communication and learning.

At present, the above-mentioned cross-chain technology paths have very high requirements for mathematics and cryptography, and require excellent professional knowledge and code ability of developers to make the project landing; the success of a project is not only about technology, but also about user experience, code friendliness, openness, market and commercial landing of the product. User experience has more detailed perspectives such as ease of operation, transaction speed, transaction confirmation waiting time and transaction cost.

At present, users can complete the most basic cross-chain transfer operations, but from the product level, the exploration of how to provide more efficient, better cost and more convenient services has never stopped; by realizing the interoperability of various ecological chains can provide more creative ways to play for the industry, and realize the revolutionary progress from landline to small phone and then to smart phone.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/cross-chain-demand-under-the-defi-boom/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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