Have you ever dreamt of a Crypto World without borders? One where you could purchase a token and find the best place to stake it without worrying about the intricacies of each chain? A single cross chain swap for all your transactions? Acquiring all the different coins you need to transact on other networks, searching through hundreds of protocols to swap, bridge and stake—it can all be a real headache.
Head, ache no more!
The dream is now a reality with the introduction of Cross Chain Swap technology!
Currently, most users must us a specific blockchain to purchase a specific token. If a users discovers a better farming position on another blockchain they must undertake a multi-step process to capitalize on it. The token first needs to be swapped into a bridgeable token, then bridged onto the destination chain, then swapped back into the original token or a synthetic version of it, and finally deposited into the farming solution.
A simple diagram of this process is shown below:
Note: A DEX aggregator searches for the best swap rate through all different DEXes.
As you can see, this process requires some time and knowledge. One must find the right DEFI applications, verify they are indeed the best choice for speed, cost and security, and manually connect their wallet to each App to perform the necessary transaction.
But how can you be sure you have the best, cheapest and fastest transactions? It seems pretty simple, just go through each of the different DEXes, and Bridges, simulate your transactions, make a beautiful Excel file and just analyze your results. Right?
Well, when you start digging, you will find:
- 522 Decentralized Exchanges (DEX) & DEX aggregator
- 27 Bridges
- 138 Blockchains
- (Thank you DeFi Llama)
With some simple math, we learn that finding the best route for your transaction by yourself is a total nightmare.
Thankfully, new projects have been popping up with solutions that simplify the above for both protocols and users. The two current solutions are:
- Omnichain Bridge
- Aggregator DEXs and Bridges
Omnichain Bridges Solving the Bridging Trilemma
Omnichain bridges like Stargate seek to solve the following issues with bridging:
Instant Guaranteed Finality: Users & Applications can trust that when they successfully commit a transaction on the source chain, it will arrive on the destination chain.From ChainDebrief
Native Assets: Users & Applications swap in native assets as opposed to wrapped assets that require additional swaps to acquire the desired asset and corresponding fees.
Unified Liquidity: Shared access of a single liquidity pool across multiple chains creates deeper liquidity for users & applications that trust in the bridge’s reliability.
Stargate\’s solution has allowed it to partner with the popular DEX, Sushiswap. This has allowed sushi to create the first ever cross-chain AMM, SushiXSwap. SushixSwap enables any user to swap two tokens between two different chains in a single and unique interface.
Protocols expanding on multiple chains are also actively looking for cross-chain solutions. For example, Angle Protocol, which mints overcollateralized stablecoin $agEUR pegged to $EUR, is now operating on Ethereum, Polygon, Arbitrum, and Optimism blockchains. To have $agEUR available on these four chains, the protocol was forced to split its\’ liquidity—less liquidity results in more slippage and unhappy users. Thanks to LayerZero (another Omnichain Bridge), Angle\’s liquidity between chains is now guaranteed finality on the source chain, allowing them to use one single liquidity pool.
Angle protocol is also a borrowing protocol, and Omnichain bridges make borrowing easier for users. With LayerZero, users can collateralize on Ethereum, borrow on Optimism, farm, and repay, all from one interface.
DEX + Bridge Aggregators:
Another approach is just to aggregate all the DEXs and Bridges so that users are always presented with the cheapest and quickest transaction. An example of this method is LI.FI (Linked Finance). LI.FI is a cross-chain bridge aggregation protocol that supports swaps by aggregating bridges and connecting them to DEXs and DEX aggregators.
They currently have two solutions, one for users and the other for protocols.
For users, LI.FI performs cross-chain swaps with one unique user interface and optimizes the trade by selecting the best route through DEXs and Bridges.LI.FI is connected to many DEXs which allows users to access a large variety of tokens and trading routes.
DEXs are selected to minimize slippage and fees. Li.Fi selects bridges by evaluating the following:
– Qualitative factors: Trust, and risk of attacks
– Quantitative factors: Speed, Bridge Fees, Gas costs, Reliability
As of today, LI.FI supports 15 blockchains, nine bridges, and 17 DEX and DEX aggregators. They have also begun integrating non-EVM blockchains such as Solana, Polkadot and Near.
It is common knowledge that bridges are often exploited. Here are the top four bridge exploits, with the most recent being the Nomad Hack.
To mitigate some of the risks associated with bridging, LI.FI has implemented a “kill-switch” that will identify an exploited route and will re-route user transactions through either smart contract level or API level.
Omnichain bridges and Bridge aggregators are two different approaches for unifying liquidity between different blockchains. As crypto continues to diversify these services that facilitate secure, fast and cheap transactions will become even more vital to both user experience and protocol growth.
I\’m not trying to argue with Vitalik….
But, as a DeFi user, I would argue that a multi-chain world cannot exist without cross-chain technology.
In February 2021, Ethereum represented 90% of the total TVL in DeFi. In August 2021, four blockchains held 90% of the total TVL. One year later, in August 2022, 10 blockchains held 90% of the total TV with Ethereum\’s market share reduced to 60%. The total TVL is being split further and further between more and more chains.
With more liquidity and DeFi protocols expanding on to multiple chains, cross-chain becomes inevitable. Users want to invest, farm and explore new DEFI solutions and cross-chain technology makes it possible.
This article was written by our contributor Subli. Be sure to check out his YouTube channel!