Feb 8, 2022
Mosaic taps into Bridges built by DeFi Protocols for greater cross-chain liquidity
Mosaic provides liquidity to fulfill users’ cross-chain transfer requests through rebalancing funds on its LP vaults. The rebalancing is done using external bridges and AMMs such as Hop, Crocswap, as well as utilizing other DeFi protocols, which I will explore in this article. To meet cross-chain demand from their own users, DeFi protocols such as Aave, Synthetix, etc. are allowing bridges to tap into their deployments on different chains. Mosaic can tap into these bridges for liquidity rebalancing through investing for tokens used by these networks, then using these protocol instances to move funds to the destination chain.
Here I briefly recap Mosaic’s approach, give an overview of bridges built by other DeFi protocols, then they are used by Mosaic to rebalance its liquidity.
Our approach to the cross-chain transfer liquidity challenge
With so many layers and chains to balance liquidity on and still nascent infrastructure, liquidity is currently too siloed for cross-chain applications to be viable. The large and growing cross-chain volume ($30bn TVL in bridges as of 7 Feb, yet still under 2% total crypto market cap) and organic development across chains and protocols, meant that it is unlikely that there will be ‘one bridge to rule them all’, due to the requirements on liquidity and technical know-how across ecosystems. It is also more efficient for the whole DeFi industry to pool liquidity across applications rather than keeping them siloed and competing against each other.
Bridge aggregators are a step in the right direction, but aggregation is not enough; if none of the bridges aggregated has enough liquidity, the transfer can still get stuck. We need an infrastructure that can act proactively to ensure the transfers go through. Mosaic’s role as the transfer availability layer is to rebalance its own liquidity using various bridges in the market to get enough funds on the destination chain to meet the users’ need. As an extra layer of assurance, Mosaic enables just-in-time liquidity bots to provide liquidity just before the transfer (rather than depositing funds in the LP vaults upfront) in case Mosaic’s own liquidity rebalancing takes too long or if the funds are insufficient.
Development in Aave Portal
Whereas Composable started with a cross-chain vision, other DeFi communities have come to the same conclusion organically. The most recent deployment is the Aave portal in Aave v3. Aave started as the lending protocol on Ethereum but its TVL in other chains have grown significantly as users sought lower fees and the liquidity mining rewards. TVL in its Avalanche and Polygon deployments have reached $2.5bn and $2.2bn respectively, compared to $7bn on Ethereum.
Before Aave v3, users couldn’t move their loan/deposit positions across deployments. It was frustrating, akin to when you go to another branch of a bank because the current one is too crowded, but your deposit couldn’t be recognised by the other branch. This has prompted the protocol to develop the Portal in Aave v3.
The Portal allows users to transfer lending positions across deployments through a ‘mint and burn’ mechanism. Users’ lending/borrowing positions, denominated in aTokens, are burned on one deployment, burn gets checked and broadcasted, then minted on another deployment. For example, you can transfer aUSDC from Ethereum to Polygon through burning aUSDC on Ethereum then minting aUSDC on Polygon. This means that Aave becomes a significant cross-chain liquidity bootstrapper, allowing protocols like Mosaic to tap into it to further bolster transfer availability.
Mosaic leverages bridges built by DeFi protocols for additional liquidity
As the cross-chain liquidity layer, Mosaic doesn’t compete with developments like the Aave portal, instead it incorporates it as another cross-chain venue/liquidity source, similar to how Mosaic uses Hop or Crocswap.
For example, if there is a need to transfer $1M worth of Dai from Ethereum to Polygon but there currently isn’t $1M worth of Dai in the Polygon pool on Mosaic, Mosaic can invest Dai into Aave, get aDai on Aave’s Ethereum deployment, use the Portal to bridge aDai to the Polygon deployment, then swap aDai to Dai on Polygon. In this way, Mosaic moved $1M from the source to destination layer to meet the users’ transfer request. The integration with Aave Portal requires permission from Aave governance, which will be addressed by Composable Lab’s governance innovations, Bribe and Mercenary Dao.
Synthetix is another DeFi protocol Mosaic could use for rebalancing. If there is a need to transfer $1M worth of USDC from Polygon to Optimism, Mosaic can invest assets to Synthetix to mint sUSD on Polygon, burn sUSD on Polygon and then mint them on Optimism. A council member has indicated on Twitter the deployment of bridges in Q1.
It is worth noting that the features required for a DeFi protocol to be plugged into the transfer availability layer are fairly minimal: it requires a protocol to have liquidity on different chains/ layers and a robust ‘mint-and-burn’ bridge between them. It doesn’t matter what the DeFi protocol does — can be lending/borrowing, DEX, yield aggregator, derivatives, as long as it has this cross-chain infrastructure, Mosaic will be able to tap into their liquidity.
Summary
Composable’s vision for Mosaic has been to connect all protocols, chains, and layers for a chain-agnostic, money lego world, with Mosaic serving as the primary orchestrator of cross-chain movements. We don’t believe there should be ‘one bridge to rule them all’; instead, we aim to bring together all thoughtful interoperable developments across DeFi protocols and become the transfer availability layer with liquidity forecasting and rebalancing of LP funds. As more and more DeFi protocols build out their cross-chain infrastructure, Mosaic will utilise them for faster and cheaper liquidity rebalancing.
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If you are a developer with a project you think fits our ecosystem and goals, and you would like to participate in our interactive testing landscape at Composable Labs, reach out to me on Telegram at @brainjar.
