Straight to the point, the cross-chain bridge will become an important infrastructure of the DeFi space. The bridge is the bottom layer of cross-chain DEXes, which will not replace the bridge and will be the final form on the user's end. As a result, cross-chain bridges will become the protocol layer in the end.
The success of the cross chain bridge depends on the liquidity, and the prosperity of the cross chain DEX depends on the routing strategy. In the future, multiple cross-chain bridge protocols will co-exist, and only the leading cross-chain DEXes will be operational.
There are two important reasons behind this. First, the form of Layer1s has been gradually stabilized leading to a flourishing ecosystem. Second, the Layer2 development of Ethereum has achieved significant results, and the development of multi-rollup will become the transitional state (or even the final state) on the scaling solutions, with core assets rapidly increasing with the development. Inevitably, the competition among different core assets will also become even more intense. Projects will increase their incentives to stimulate the flow of assets between different L1s and L2s . The interoperability problem between multiple chains will directly hinder the development of both L1s, L2s, or any such protocol in between.
The cross-chain bridge can solve interoperability problems, and so it has attracted much attention. Liquidity of assets can be directly obtained through the bridge within various Layer 1 and Layer 2 ecosystems in a barrier-free flow, which will bring more opportunities to the crypto space. Consequently, in the future, the cross-chain bridge will be an important DeFi infrastructure. Imagine how convenient it would be if the users were able to farm among different chains without having to go through a cumbersome token swap process. In addition, cross-chain bridge aggregator and the cross-chain DEX aggregator are new narratives, derived and built upon on the cross-chain bridge, we will see more in the coming days.
From the current point of view, in the initial stage of the cross-chain bridge, each L1 will establish the asset channel to Ethereum, namely the official bridge, in order to obtain ecosystem assets from the Ethereum ecosystem. By current estimation, official bridges have about $2.5B of assets locked in the cross-chain bridge. The core assets mainly include WETH/ETH and stablecoin USDC/USDT, as well as chain assets such as MATIC, AXS, etc.. After the migration of enough tokens from Ethereum, each chain will focus on building their own ecological projects. They initiate counterparty projects of the Ethereum ecosystem to strengthen the core of their own ecosystem. BSC's Pancake,Solana’s Raydium,Terra 's Anchor, etc., all follow this path.
However, these separate ecosystems have not built any barriers; instead, they have been promoting the activities such as liquidity mining, Airdrop, and Yield Farming that promotes the flow of assets. The demand for cross-chain bridges is obvious, and a large number of third-party bridges are beginning to appear to solve specific cross-chain problems, such as multi-chain support, security, effectiveness, ease of use and so on.
At the beginning of the development of third-party bridges, in order to obtain scalability, most of them will support EVM compatible chains, such as Multichain (former Anyswap), Celer, Synapse, etc., in order to attain faster development speed and more core assets.
However, with the development of Ethereum L2, some bridges are specially designed for Ethereum and L2 assets to cross the chain in order to solve the problem of long swap periods, such as Connext, Hop and so on. Considering that L2s do not issue coins, the growth of TVL of cross-chain bridges after issuing coins is expected. The future development trend must be multi-integration, i.e. the integration of EVM and L2, the integration of non-EVM and EVM. The ultimate destination of all cross-chain bridges will be as prosperous as L1s In the end.
In addition to its users, the most discussed thing about cross-chain bridges is its security model, or the way they manage to relay assets. Simply put, there are multi-signature models, MPC models, and light client verification models.
Divided by the signer, there are internal validator models and third-party validator models. It can also be categorized by whether they are permissionless, and whether the validators need to stake assets. In fact, the essence of categorization is the same as the way of dividing the degree of centralization, which defines how to manage assets with the degree of decentralization.
In my opinion, the realization of cross-chain technology can not solve the problem of decentralization. Absolute decentralization will not exist, especially for more complex data cross-chain, and the current solution has more or less drawbacks.
Whether the Staker is set on Celer, Bonder of Hop, or Router to Connext, there is a problem of centralization to a certain degree, which is essentially similar to the ecosystem model of PoS chains. Cross-chain validation can be compared to a scaled-down version of the staking mechanism - no matter how it is designed and regardless of the reference standard definition, the definition of centralization is arbitrary, and the perfect centralization solution only exists in Utopia. Until now, the centralization problem of staking mechanisms is being strongly debated, and it is the rapid development of PoS that has diverted people's attention. Since absolute decentralization cannot be achieved, the discussion based on security issues may be meaningless. If the parties concerned are not corrupt, cross-chain development only needs to be established on a technical premise, i.e. not possible to be hacked and without any single point of failure.
In addition to the security model, most of the cross-chains face availability problems, including liquidity, commision fees, token unification and so on. Third-party bridges basically adopt the way of self-built liquidity, which is difficult to reach a high TVL. Moreover, it is difficult to have a good trading depth if the atomic exchange on the official bridge is used - it will face the problem of inconsistent time-lock and mintToken standards. Adding liquidity to the target chain seems to be a general solution, but this approach does not achieve scalability, and the project can only encourage some key pools to gather the initial liquidity. For example, the liquidity incentive on Celer is basically concentrated on ETH and USDC/USDT, and the incentive program is not sustainable. After the incentive is over, the money will turn to other mining programs. The use of the transaction fee model seems to be a good means, but at this stage can not meet the incentive needs. On the contrary, Connext has adopted a smarter approach, promoting various project parties to provide liquidity by way of protocol. although it remains to be seen whether it’s feasible. The market will have the final say here.
Furthermore, the bridge faces user’s learning cost issues. For example, some transfer-state tokens, such as AnyUSDT, hETH, etc., have been added in order to support certain functions, and there are also some stablecoins issued by protocol, such as Synapse's nUSD. A large number of new concepts make users feel lost. The ideal way is to hide all the logic behind the transaction through technology, leaving the user only a transaction page similar to that in Uniswap.
The Aggregator of the cross-chain bridge is a promising space, because it can meet the needs of Uniswap trading interface only. Furthermore, the Aggregator built on the cross-chain bridge deepens the function of the bridge, adds transactions, and enriches user paths. Cross-chain DEX is a multi-chain version of the 1inch DEX model. It not only integrates DEX, but also aggregates cross-chain bridges. Users can use both Swap&Bridge or Bridge&Swap, which can more effectively complete token swaps, but the problem with the aggregator is that it only optimizes paths/routes, and not liquidity. As a result, we will still encounter the embarrassing situation where no suitable trading pairs exist due to the absence of liquidity. Its success still relies on the richness of cross-chain bridges and DEXs in their respective ecosystems.
The core strategy is Cross-chain aggregator optimization, just like Yearn's mining strategy, which essentially increases the utilization rate of capital. The intelligent routing strategy determines user adoption. A simple example, If you want to swap the BNB on BSC to ETH on Ethereum, the route can be to first exchange BNB with ETH on BSC, and then change it to ETH on Ethereum through bridge setting. Or, you can first change BNB on BSC to BNB on Ethereum, and then Exchange BNB to ETH through DEX on Ethereum. In theory, the lower the transaction friction cost, the higher the chance of adoption. However, no matter which route the current aggregator uses, the friction cost is extremely high, sometimes reaching as high as 30%~50%!
Liquidity dilemma is the main problem of the current third-party bridges (Multichain liquidity $5B, Celer liquidity $118Mil, Hop liquidity $124Mil, Connext$17Mil), and it is also encountered by the cross-chain DEXes based on the cross-chain bridge protocol. I think any problems related to learning costs and using costs will eventually be resolved, but the liquidity dilemma now does not seem to have a sustainable strategy. Studies based on Uniswap’s dividend strategy, Sushi’s liquidity "predatory", andPancake’s own ecological development, etc. can help us learn more.
At present, although Multichain's liquidity is far ahead, compared with the current mainstream DEX, there is still a gap in transaction volume, but this gap is not significantly large (data on December 31, 2021, 24h transaction volume of Multichain is $133Mil, cBridge $22M, and Uniswapv3 on Coingecko just $1.4B) The trading volume reflects liquidity, and Multichain’s current liquidity is also the highest.
In the future, it is not easy to predict whether the leader will be able to maintain the advantage. The market is volatile, as liquidity is not a long-term protection barrier of a protocol; it is only a magic weapon for victory over a comparatively short period of time. The war of cross-chain bridges has just begun. There will be more cross-chain bridges in the future, but cross-chain DEX aggregators will only appear in the leading projects. Whatever be the case, betting on infrastructure will not be wrong.