The future of interoperability: Part II
With BIFROST Network mainnet around the corner, let’s dive into its potential use cases and compare it to other solutions available on the market. If you haven’t read the first article in this series that covers different approaches to the interoperability problem, it’s available here.
One of the most important issues the crypto industry faces is the lack of robust and secure interoperability solutions. While different types of bridges have been on the market for some time, users started reasonably questioning the security of these solution due to the number of exploits, many of which have been successful. It raises questions if these obstacles even could be overcome and if the future is cross-chain.
We definitely believe it is. Just as the world economy benefited hugely from globalization, the blockchain economy will benefit from chain specialization and their efficient interconnection.
For instance, Solana has a very high performance which makes it a better choice for applications that demand heavy computations or frequent transactions. On the other hand, the Ethereum network is incredibly secure and decentralized, which is perfect for DeFi applications. Finally, for the apps that need to store large amounts of data, Arweave or Filecoin would make much more sense.
It’s not surprising that in the early stage of development, all the layer-one blockchains have been competing for essentially the same user base and have had a very similar trajectory of development. Trying to emulate Ethereum’s success, they started copying liquidity mining, NFTs, and whatever else worked on Ethereum. But as alternative layer-ones make different tradeoffs in solving blockchain trilemma, their designs suit some things better than others.
The idea that each blockchain will just fork all the apps, add some incentives, and it would lead to a flourishing ecosystem is simply not viable. In a world where blockchains are no longer general-purpose networks, communication between them is absolutely essential.
In our last article, we covered different designs that token bridges and more generally, messaging passing systems rely on, as well as introduced BIFROST Network. As a reminder, BIFROST is a layer one blockchain utilizing Substrate NPoS technology focused on enabling interoperability between blockchains. It is a generalized, externally-verified message passing network that aims to connect otherwise separated networks.
What makes BIFROST Network unique is that it is designed to operate with native tokens, and it is generalized at the same time. That unlocks plenty of use cases, with the largest two being cross-chain swaps and lending. But there is much more than that, so let’s dive into potential applications that can be built on top of the network.
Exchanging assets belonging to different chains in a truly decentralized, permissionless manner is a non-trivial challenge. It is one of the areas that is still fully dominated by centralized solutions (CEXes), with all the risks associated with this design. A successful cross-chain exchange that will revolutionize chain-agnostic DEXes the same way Uniswap revolutionized single-chain DEXes should be able to:
- facilitate efficient cross-chain communication
- have access to deep liquidity
There are a few approaches how to approach this problem, with the first and the most broadly used in DeFi today being wrapped tokens. While easiest to implement and relatively cheap, this design has a very significant flaw — wrapped tokens lose the security guarantees of the network their native counterparties run on. Given that security is a big part of what makes native coins valuable in the first place, it’s an unsatisfactory tradeoff to make. We are convinced that wrapped tokens are a temporary solution to satisfy demand before more secure and decentralized alternatives emerge.
Another interesting design that excludes bridges from the equation, is RFQ (request for quote). It relies on market makers to have liquidity on different chains and execute order flow generated by the platform. A dominant player in this utilizing this design is Hashflow. The benefits of this approach are low fees (zero slippage) and guaranteed execution. On the other hand, by design traders rely on quotes from market makers, who in some cases, for instance in periods of high volatility, may be reluctant to provide liquidity with tight spreads. Additionally, this design is hard to abstract beyond smart-contract platforms.
Finally, the problem might be solved by having pools of liquidity on different chains and the relayer network that facilitates cross-chain communication. Although simplified, it might be compared to cross-chain Uniswap. The dominant project utilizing this approach is THORChain with its protocol-built network THORSwap. The design is chain agnostic and might be easily extrapolated on networks that don’t support smart contracts, such as Bitcoin and Dogecoin. The drawback of THORChain is that it’s not a general-purpose network and essentially exists to facilitate THORSwap.
When it comes to cross-chain DEX, THORChain is the closest competitor to BIFROST Network, although, unlike the former, the latter is a general-purpose blockchain. BIFROST cross-chain DEX also uses the network’s native token, BFC, as a settlement asset for cross-chain swaps.
BIFROST pioneered permissionless cross-chain lending with its lending platform BiFi, which connects native BTC to the Ethereum market. Users can borrow ETH and ERC-20 tokens against their BTC without the need to bridge (wrap) their bitcoins.
With BIFROST Network, a cross-chain money market will connect native assets on all supported networks. Arguably, it makes wrapped tokens obsolete as one of their dominant use-cases — using in DeFi money markets on other chains, could be done without bridging. As discussed earlier, wrapped tokens lose security guarantees of the underlying chain, so native cross-chain lending is a more secure design.
Cross-chain lending will make markets much more efficient — right now, Aave v3 has six markets on EVM-compatible chains. Some assets such as USDT and USDC are natively cross-chain (being wrapped USD), but each of these markets still has wrapped assets. That creates fragmented liquidity and a less efficient market overall, in addition to risks associated with wrapped tokens discussed earlier. With a natively cross-chain money market built on top of BIFROST Network, liquidity for each asset will be mostly concentrated on its asset’s home chain, which would make markets more efficient and secure.
Cross-chain DEX and lending market are the major pieces of infrastructure BIFROST Network will be focusing on post mainnet launch. At the same time, there are many other potential use cases that may solve some of the industry’s problems.
Cross-chain governance. As many projects moved multi-chain and deploy their codebase on different networks, most still perform governance on one chain (mostly, Ethereum). Cross-chain governance will allow DAO members to vote on the network of their choice, without the need of bridging tokens every time.
Joint liquidity. Decentralized exchanges deployed on different networks will be able to unify the liquidity of the same assets that share the same underlying security guarantees (USDC, USDT, ETH on L1 and L2), which would make liquidity much deeper and markets more efficient.
Cross-chain NFT marketplace. NFT marketplace built on top of BIFROST Network may allow buying NFT on one chain with the assets on another chain, with swapping and bridging happening completely in the backend.
If you are as excited about the cross-chain future as we are, and want to build cool applications on BIFROST Network, contact us!