Introduction
We are stepping into Web3’s new frontier and, despite scalability being a talking point for many years, it is a sobering realization. However, like any frontier, it comes with its unique set of challenges and unfamiliarities. Among these, one that stands out starkly is the concept of ‘Finality risk.’ As the world continues to scale and the flow of asset transfers across distinct blockchain ecosystems surges, this concept is becoming increasingly important to familiarize oneself with.
Finality risk essentially represents the uncertainty that a transaction, once completed, may not be as final as it appears. This risk is slightly increased when performing cross-chain transfers, since multiple blockchains, each with their own rules and timings for transaction confirmation, need to interact. The crux of the issue lies in the three-pronged cross-chain transfer process that includes: Transaction initiation, confirmation, and finality.
When it comes to cross-chain bridging, if users want fast transfers, there will be some finality risk to bear. Just who bears it depends on the design of the protocol. This guide will break down further what finality risk is, why it exists and what it means to end users’ bridging experience when they bear the finality risk in cross-chain transfers.
Fortunately this risk does not have to be shouldered by you, if you know to use the right platform.
What is Finality and Why Does Finality Risk Exist?
In simple terms, finality refers to the point at which transactions or blocks in a blockchain are considered immutable or irreversible. Achieving this state ensures the security and reliability of transactions, a critical aspect for both dapps and users.
Finality exists due to the decentralized nature of blockchain systems, which require a consensus mechanism to validate transactions. In the process of reaching consensus, there’s a period where a transaction is confirmed but not yet irreversible, or ‘final.’ The time it takes to reach this final state can vary based on several factors including the blockchain’s design, the consensus protocol used, and the network’s load at any given time.
Finality risk is, therefore, the potential that a transaction showing as ‘final’ on a protocol’s UI, for example, could in fact be reversed or altered, due to issues like network latency, forks or attacks on the network (exploits). This risk is particularly significant in cross-chain operations, where transactions are dependent on the finality of multiple different blockchains.
These risks exist today because the solution to fully eradicate them has not yet been solved. However, engineers have developed a number of strategies to mitigate their impact. The use of checkpointing, where certain blocks are designated as ‘checkpoints’ and considered irreversible, have been helpful in reducing finality risk, for example.
Additionally, the choice of consensus mechanism is one key factor, with options like Proof-of-Work (PoW), Proof-of-Stake (PoS), and Byzantine Fault Tolerance (BFT) offering varying trade-offs between security, speed, and energy efficiency. PoS and BFT-based systems, for example, tend to offer faster finality times than PoW systems, reducing the window of vulnerability to finality risk. Ethereum’s shift from PoW to PoS (via its Beacon Chain) is a prime example of this strategy in action.
Why Finality Risk is More Pertinent to Cross-Chain Transfers
When you’re transferring value between blockchains, finality issues can potentially lead to loss of assets, which can be catastrophic, albeit extremely rare. As previously mentioned, unlike regular transactions on a single blockchain, cross-chain transfers involve multiple blockchain protocols, each with their own rules, timings, and mechanisms for achieving transaction finality. This inherent complexity amplifies the potential for finality risk.
Moreover, different blockchains have different times to finality. A blockchain with a slower finality time could potentially delay the whole transfer, making the transaction vulnerable to other risks such as price fluctuations in the case of cross-chain swaps. In a worst-case scenario, issues with finality could even lead to double-spending problems, where the same assets are spent more than once. This is obviously a major concern for users, as it could lead to significant losses.
With these risks in mind, it is crucial for users of cross-chain bridges to understand finality risk and choose platforms that have robust measures in place to mitigate it.
How Across Mitigates Finality Risk for Users
At the heart of Across’ strategy is a strong commitment to offloading the burden of risk from the users to the relayers within its ecosystem. Here, third-party relayers risk their own funds to bridge assets. These relayers can choose to execute transactions faster than the origin or destination chain’s finality times, offering “fast fills.”
Relayers can take calculated risks and compete with each other on speed to fulfill users’ deposit requests, but most importantly, since they lend out the funds before they are finalized, they are taking on the finality risk, not the users who have received their assets optimistically ahead of block immutability.
Across leverages UMA’s optimistic oracle to confirm the authenticity of transactions on all chains. If any transaction is found to be incorrect, it will be disputed and resolved by $UMA tokenholders. In the event of a dispute, UMA’s oracle requires only one single honest actor to detect and contend the fraud, which ensures that the absolute minimum network commitment still protects the security of the protocol.
All of these measures, ultimately, underpin Across’s commitment to mitigating finality risk, fortifying secure, efficient cross-chain transfers and greatly improve the user experience.
How Other Bridge Designs Stack Up
The bridge that enables the right party to take finality risk away from the user, ultimately improves the user experience, right? Well, when it comes to mitigating finality risk, not all cross-chain bridge designs are created equal. The approach to handling finality risk can vary significantly across different platforms, with substantial implications for users.
Some platforms, unfortunately, have opted for designs that carry an excessive amount of finality risk and while these systems may appear to function seamlessly under normal circumstances, they are, in essence, a ticking time bomb.
For instance, there are platforms that shift the burden of finality risk onto liquidity providers (LPs). This design choice can put LPs in a precarious position, because in the event of a finality disruption they could face significant financial losses. At the same time, the platform might be able to sidestep the immediate consequences, passing the buck to those who are least equipped to manage it.
So far, many of these platforms have not been penalized for their approach to finality risk, largely due to the fact that major disruptions have been, luckily, relatively rare. However, as the saying goes, past performance is not indicative of future results. Just because a platform has not yet experienced a major finality disruption does not mean it is immune to one.
As a user or a potential LP, it’s crucial to understand these dynamics. A platform’s design choices reflect its approach to risk management, and by extension, its commitment to user security.
Conclusion
Ever-evolving blockchain ecosystems are full speed ahead towards automation, but the solution to the interoperability equation remains as the roadblock and finality risk is the pothole that befalls many cross-chain travelers.
For users navigating this landscape, it’s crucial to understand the potential risks associated with cross-chain transactions, especially the implications of finality risk, and we hope that this article has been a help in guiding you towards understanding. In the race to achieve interoperability, platforms that do not properly address this risk are like vehicles driving at high speeds with faulty brakes. They may appear to be performing well, but the danger lurks under the surface, ready to cause damage when least expected.
By leveraging the power of UMA’s optimistic oracle and pioneering a permissionless relayer bridge design, Across is paving the way to perfecting the cross-chain transfer experience, and we start by never asking end users to shoulder any finality risk.
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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