Brass Tacks on a Liquidity Network vs. Mint-and-Burn
Since inception, Across has championed liquidity network bridge designs. The reasons for this are primarily security-related, as liquidity networks only use genuine or canonical tokens that are present on both the origin and destination chains.
Over the last 18 months, we have seen many mint-and-burn bridges suffer from product-ending hacks. With this bridge design, a cross-chain transfer can begin processing even when there is no liquidity immediately available on the destination chain.
Mint-and-burn bridges involve locking a token on its native chain and minting a synthetic representation of the token on the destination chain. While this method has been widely used, it presents potential security risks due to the reliance on synthetic tokens.
Bridge design could seem black and white, but there are tradeoffs for the two.
Mint-and-Burn Style — Multichain & Hop
There are two types of mint-and-burn bridges, which we will highlight based on their championing products:
Multichain style: This style is the one that has lent itself to the most exploits, including to Multichain itself. This design locks the canonical funds on mainnet and mints temporary replacements on the destination chain. This design is very cheap, because it does not require moving any assets. However, it comes with risk tradeoffs which are:
i. Existential
ii. Liquidity-based
If there is not enough of a canonical or real asset on the destination chain, you may receive a temporary synthetic token that is not usable elsewhere until you can swap it back.
Users of this bridge style are exposed to bridge exploits for the entire time their layer 1 assets are locked.
Hop style: Hop uses a short-term mint-and-burn mechanism as a means to providing liquidity to an AMM on both the origin and destination chain. Funds are not locked on L1 as in the above example, but instead, are temporarily swapped for synthetic versions on the origin chain, which are then burnt and minted on the destination chain. Immediately they are swapped for canonical tokens provided by incentivized liquidity providers. This means Hop users are not exposed to bridge smart contract risk after they have collected their canonical tokens on the destination chain.
Hop uses mint-and-burn but not in a way that exposes its users to ongoing security threats, and from a security perspective is more similar to Across.
Liquidity Network Style — Across
Liquidity network bridges, on the other hand, work exclusively with canonical tokens, which are the “official” versions of tokens on L2s and rollups. This approach offers better security and user experience, as it eliminates the need to interact with synthetic tokens. However, liquidity networks require that liquidity be present on destination chains when the user needs it.
Therefore, liquidity network bridges face challenges in capital efficiency and fragmented liquidity. To achieve optimal capital efficiency, a protocol must be clever in their deployment of capital to service transfer volume. The balance between fees charged to end-users and yields paid to liquidity providers (LPs) reflects capital efficiency.
Liquidity network bridges require capital on all chains they connect. However, their ability to manage and rebalance this capital impacts their capital efficiency. A protocol that effectively manages funds will charge the lowest sustainable fees, attract more users, and retain attractive yields for LPs.
Brass Tacks: Liquidity Networks require Liquidity Management
Any bridge that ensures its users only ever hold canonical tokens must solve the liquidity allocation problem. This is where Across stands out compared to AMM bridges. AMM bridges solve the liquidity problem by putting enough liquidity on each and every destination chain to serve its users. When it fails to have enough, users pay for that with slippage.
Across does not require equal liquidity on each chain, but instead uses a method called predictive rebalancing to ensure that enough liquidity is available when it is needed, but not more than necessary. You can read more about predictive rebalancing in this post.
In addition to this, third party relayers are the actual ones holding the capital that users will be paid on destination chains. The relayer will send the exact bridged amount (less fees) to the user–And Across never has any slippage. AMM liquidity solutions can work well, but they are the “brute force” solution to liquidity needs. We believe that Across solves that problem in a more elegant way, and it is why we call Across the most capital efficient bridge.
Try it today and see for yourself — Most users who try Across stay with Across.
Across is a cross-chain bridge for L2s and mainnet Ethereum. It is secured by UMA’s optimistic oracle. Across optimizes for capital efficiency by running a competitive relayer landscape, concentrating liquidity, and by offering a no-slippage fee model.
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