Why cross-chain Matters
Cross-chain and multi-chain talk is super popular, with many sharing their opinions on it right now.
Some industry leaders are claiming that cross-chain is bad for crypto and multi-chain is better to the polar opposite, while others are of the opinion that cross-chain is the future of DeFi and isolated multi-chain future goes against what crypto is all about.
But when you’re in the crypto space, advocating for the stifling of technology and developments isn’t really going to get you anywhere.
People, the power behind crypto, want options and the ability to swap or transfer cross-chain easily. So, that’s where the development is.
There are over 100 bridge and cross-chain swap projects in development right now, indicating that users want them and the space needs them.
Nobody wants to be locked into one blockchain with all their assets and liquidity just because that was the first one they chose to join. Sure, you could transfer your liquidity back to a centralized exchange to move it to another supported chain, but that takes time, resources, and trust in a centralized entity and third party — something that those involved with DeFi don’t want to do. CEXs also frequently halt withdrawals of particular tokens or networks based on what they deem to be an appropriate time, which is yet another downside to the current swapping process.
While blockchains are designed to operate independently from one another without interference or interaction from other chains, a vast number of them out there want the ability to interact with each other. While isolation allows each respective blockchain to have its own benefits, vision, governance, and economic system, it also causes problems, such as liquidity fragmentation between chains and the headache of bridging or swapping assets or tokens between them.
Users in DeFi want the choice to go wherever they want, with access to any blockchain they choose, the benefits of using whichever chain they prefer at that time, and the ability to transfer their assets easily and quickly for use on any other blockchain.
Cross-chain swaps and bridges are a necessity for the future of decentralized finance (DeFi), and are more needed and requested than ever before.
Liquidity Migration or Fragmentation
Over the last two years, crypto has seen an insane increase of capital and liquidity into new layer 1 and 2 chains, and a rise in the total value locked (TVL) migrating over to them.
In January of 2021, TVL on all chains was roughly $16 billion, and 97% of it was on Ethereum Layer 1. Just 12 months later, in January of 2022, TVL had skyrocketed to $180 billion USD with 45% of it being on non-ETH chains.
Again, this shows that users want options, unlike what they get in traditional finance. The point of DeFi is to not be limited like those traditional markets — users don’t want just one chain or financial market being the only option for them.
The entire point and goal of crypto is freedom and options, and this is why the future is moving to cross-chain.
Think of users like birds. They can be happy with where they make a nest, but they’re always flying around looking for new places to eat or maybe even make a new nest. Many of them even migrate for certain parts of the year based on their requirements and preferences. Similarly, crypto users may make a home on their chain of choice, but that doesn’t mean they don’t want to look around for alternatives, to see how they like it there.
Due to this migration of liquidity, it is becoming more and more necessary for users to rely on bridges to take advantage of the offerings of different blockchains. But bridges can be a pain!
So, what is a bridge, and how does it work?
Primarily, a bridge for cryptocurrency provides a way to transfer a token between two different blockchains without the need for a third-party intermediary.
A smart contract is used to create a two-way peg between two different chains by locking up or burning (destroying) a token on one blockchain in exchange for an equivalent amount of the same token or asset on the other blockchain. This is done so that the amount of said asset or token does not change, and the user can freely transfer assets between the two blockchains without the need for a third party.
Once the token is bridged/transferred to the new chain, it can be used just like any other token: to swap, provide liquidity, farm, etc.
Currently, there are quite a few different types of bridges that make it even more challenging to figure out what to use to go cross-chain.
With most bridges taking anywhere from fifteen minutes to a few hours (and some even taking a few days,) users trying to catch a deal or quickly join a farm on another chain might find themselves in a tough spot as prices and APR can change drastically in that time.
The other major component of most bridges is that they require users to lock or burn their token in order to receive (or mint) the token or wrapped token on another blockchain. This can be a cause for confusion, or just a pain to deal with, as there are so many different options and you don’t know how long each option takes — sometimes it varies wildly, with the same bridge taking ten minutes one time and over a half-hour on another transfer.
The goal is to find the best solution: one that is secure, non-custodial, user friendly, and fast.
This is a must for the future of DeFi. As all blockchains are independent, decentralization cannot be fully realized and achieved without a secure way to communicate and swap between chains through a decentralized protocol.
The importance of cross-chain Swaps
With this crazy increase of users and money moving to other chains, the multi-chain liquidity fragmentation issue just gets worse. When you have 98% of all liquidity locked across ten blockchains and then further fragmented over hundreds of exchanges, it becomes more than just a bit of a problem.
How are you supposed to find the best price on the token you want if liquidity is spread across so many chains and exchanges?
Well, the best solution to that problem is to create an incredibly easy, fast, and secure way to swap assets cross-chain.
Connecting these blockchains is becoming a necessity as more networks are created and liquidity is further fragmented, causing cross-chain swaps to be more important than ever.
You should have the flexibility to use whatever chain you prefer.
You may even enjoy using multiple different blockchains as each of them has their own unique qualities, features, farms, tokens, etc.
However, as the ecosystem becomes more multi-chain focused, liquidity continues to migrate to other chains and exchanges, further fragmenting the space. It quickly becomes frustrating and annoying to find out about a new token you want but realize that it’s not on the chain you’re on. Trying to purchase a token or having all your capital and liquidity isolated on another blockchain makes it difficult to easily interact with or trade in a timely manner with other chains.
For this reason, cross-chain swaps, or the ability to quickly and easily transfer assets and tokens from one blockchain to another, will become a necessity for DeFi to succeed.
Having completely isolated chains not interacting with each other in any way goes against what crypto is all about.
Where are we Now?
A growing number of projects in the space are working on helping the multi-chain and cross-chain swap issues: Wormhole, Li-Fi, Celer, Nomad, and Connext to name a few.
Wormhole SDK provides a way for apps, protocols, and more to communicate with other chains, securely sending and receiving messages in seconds.
Li-Fi is aggregating bridges on different chains into one space in order to make the process of cross-chain swaps easier and more user-friendly.
Make sure to keep an eye out there, as we believe, cross-chain is the future of DeFi.
