Why Analog’s Omnichain Interoperability and Privacy Mechanisms Will Fuel Exponential Growth in DeFi | Analog Insights
An in-depth look at how Analog could be a driving force in the world of decentralized finance
How do you know that a technology has evolved from disruptor to establishment? It is simple. When people start to talk about how the technology will disrupt various sectors. That is the situation that Fintech — the fusion of financial services and technology — finds itself in. In the past, Fintech has helped to propel all aspects of financial services in the digital era.
Fintech players such as PayPal, Square, and Stripe are no longer patchy start-ups taking on legacy financial operations — they are very much part of the establishments. Despite this fact, the Fintech sector is powered by web2 platforms, the internet era that is dominated by heavily centralized entities such as Amazon, Google, and Facebook.
Web3 platforms — powered by Blockchain — are currently in their biggest bull market in history, signaling the beginning of an end of the Fintech industry that is barely two decades old. This is not the first time we have witnessed massive growth in the sector — especially price hikes in cryptocurrencies.
However, there is a general agreement that post-2020 circumstances are different from the 2017 rally. There are parallels between the exponential growth of web3 platforms and decentralized finance (DeFi).
With promises of an open-source, permissionless, and consumer-centric financial ecosystem, DeFi is set to change the trajectory of institutional finance. As of December 2021, DeFi-based protocols had US$ 251 billion in total value locked (TVL), with Ethereum dominating the market share, followed by Terra and Binance Smart Chain (BSC).
Barriers to the Growth of Decentralized Finance
As it found its way into the cryptocurrencies, big money will ultimately find its way into the DeFi space. As it currently stands, the DeFi sector has an impressive and diverse Blockchain ecosystem such as Ethereum, Terra, and BSC. All these platforms provide smart contract capabilities that allow transactions to be executed outside of the traditional banking or regulatory environments.
But two critical issues need to be resolved for the sector to achieve its full potential: privacy and interoperability.
- Privacy
Aside from the high transaction fees and lack of scalability, DeFi transactions on most permissionless networks like Ethereum are public. If you know someone’s wallet address, you can easily decipher every transaction they have carried out, including the amounts, the parties involved, and usage trends.
Malevolent actors can publicly share this information, risking many parties, especially if huge sums of money is involved. The lack of privacy mechanisms also results in unacceptable risk levels. Since anyone on the Blockchain ecosystem can view the transactions, front-running — exploiting the mempool concept where transactions are queued to be included in future blocks — has become rife on Ethereum-based DeFi.
With front-running, miners have the liberty to choose which transactions they include in a block and will often select those that have the highest gas fees. In the recent past, we have seen an upsurge in front-running bots that continually scan the mempool for profitable transactions, a process that disenfranchises other trades.
2. Interoperability
As things stand, the DeFi industry is highly dependent on siloed chains that lack built-in features for cross-chain interoperability. The lack of interoperability within the sector comes with an unfortunate side-effect, in that liquidity becomes fragmented across many DeFi ecosystems.
In this regard, we have seen developers racing against time to implement solutions that integrate disparate networks. At the outset, these solutions can be grouped into three:
- Pairwise bridges. These platforms allow a crypto asset owned by one user to be locked/burnt on one network while an identical asset is unlocked/minted on another network. tBTC and wETH are typical examples of pairwise bridges. However, pairwise bridges require significant engineering efforts to create and are not ideal because they increase the security risks in the interoperability space.
- Oracles. These are nodes that deliver off-chain (real-world) data to smart contracts in decentralized networks. API3 and Chainlink are common platforms that contribute to interoperability through oracles. However, these platforms operate largely as data source agnostic interoperable solutions and are fraught with intermediaries that exclude actual data providers.
- Sidechains and hubs. These are primarily layer-2 protocols that are compatible with a single mainnet (hub). Cosmos and Polkadot are two major protocols that use this model to provide interoperability mechanisms. In a Cosmos ecosystem, many zones (independent chains) can interoperate through inter-blockchain communication (IBC) protocol. Polkadot has a similar architecture and allows parachains to communicate with the relay network through the cross-chain communication protocol (XCMP). However, despite these functionalities, both Cosmos and Polkadot networks are largely centralized platforms because users cannot seamlessly transfer assets outside of their ecosystems.
Analog’s Value Proposition for Decentralized Finance
Analog is the world’s first omnichain network that securely integrates all Blockchain ecosystems, users, and assets through validated event data to deliver web3 interoperability. It consists of time nodes (network validators), tesseracts (interoperability nodes), secure gateway application programming interfaces (APIs), and software development kits (SDKs) that facilitate composability between disparate chains. Analog’s value proposition in the DeFi sector is hinged on two factors: Omnichain interoperability and zero-knowledge proofs (ZKPs).
Omnichain Interoperability
Instead of pairwise bridges, oracles, or sidechains that are largely centralized, the Analog network relies on decentralized architecture provided by tesseracts and proof-of-time (PoT)-enabled consensus to seamlessly connect all chains. It allows current and new decentralized applications (DApps) to expand beyond the borders of Ethereum Virtual Machine (EVM) and non-EVM chains. Our interoperability approach is different from cross-chain connectivity, which focuses only on two chains or multi-chain interactions that enable multiple chains to connect to a single network but not to each other. As an omnichain, interoperable platform, the Analog network creates a shared infrastructure where all chains interact, allowing frictionless transfer of event data. While today’s cross-chain interoperability is synonymous with bridging, there is so much that Analog’s omnichain future holds for the DeFi sector, including:
- Unified liquidity
Today’s cross-chain solutions compete to attract liquidity providers (LPs) across their networks, creating liquidity fragmentation in the sector. Rather than having a universal pool that provides liquidity for an asset to all the connected Blockchains, each LP selects one pool that connects to one network.
Analog network allows all chains — existing and new networks — to interoperate through validated event data. This creates unified liquidity across all networks with guaranteed block finality on the source and target chains. For example, if you transfer an asset from Ethereum to the Terra network, the Analog network ensures that the asset will move to the Terra network while the LPs receive fees for their services.
2. State sharing
Automated market makers (AMMs) such as Uniswap and SushiSwap exist on multiple chains, with each instance running in a siloed ecosystem. For Uniswap to synchronize its state across Ethereum and BSC, for example, developers have to write multiple codes for different bridges that interoperate across these chains.
Since new layer-1/layer-2 and bridges are constantly in flux, this process is not only tedious but also untenable in the long run. With Analog network, AMMs would have a single event data API and SDK to implement state sharing and cross-chain pairs.
3. Lending and borrowing
Various decentralized money markets (DMMs) like Aave and CREAM have emerged to provide lending and borrowing services to users in a trustless manner. Rather than functioning as centralized entities, DMMs primarily operate through smart contracts that decentralized nodes manage on-chain.
While DMMs are attractive to users, users cannot seamlessly lend or borrow across different chains. Suppose you have an asset on Ethereum and wish to borrow on BSC. You would have to collateralize on Ethereum, bridge (at a fee), borrow on BSC, and swap back on Ethereum (at a fee). This process is frustrating (due to the many steps involved) and costly.
Analog facilitates a cross-chain connection between multiple chains in near real-time. For example, borrowers that have assets on Ethereum can seamlessly borrow on BSC through a one-click transaction.
Zero-Knowledge Proofs
ZKPs have been around for many years now, after successfully being implemented in Zcash as privacy-preserving mechanisms. In the wake of increased demands for private transactions, ZKPs are increasingly becoming viable privacy-enforcing alternatives in an interoperable web3 space.
At Analog, we believe the future of web3 lies in privacy-preserving DApps that can interoperate seamlessly across any chain. Analog provides flexibility to DApp developers that want to create DApps via trustless ZKPs. Because there is no trusted setup, ZKPs is compatible with any virtual machine, and developers can use them to build and deploy interoperable and privacy-preserving DApps on any chain.
Conclusion
The current Blockchain ecosystem is extremely fragmented; with hundreds of Blockchain networks, dozens of bridges, DApps, and users scattered. At Analog, we believe the future of Blockchains is in decentralized interoperation. In this regard, Analog creates value for platform builders, DApp developers, and users.
For example, platform builders can plug their Blockchains into all other chain ecosystems without worrying about interoperability. DApp developers can unlock global liquidity by hosting their DApps on any platform and communicating with other applications via cross-chain event transfer protocol (XCETP) API. On the other hand, users can use Analog to directly interact with all the DApps across the entire Blockchain ecosystem from their wallets.
Join us in this privacy-preserving, omnichain revolution!
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