Conflux Network
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Conflux Network

Pushing the Boundaries of the Multi-Chain Era

No to liquidity fragmentation; YES to collaboration on interoperability.

Last week we announced our collaboration with cBridge by Celer Network and Multichain (previously Anyswap) to provide ecosystem users with the best cross-chain experience from industry leaders with no liquidity fragmentation on Conflux eSpace!

The time has changed from the rise of Ethereum-killers to an interoperable future of co-existing layer-1 and layer-2 protocols. With the multi-chain paradigm shift, mainstream assets are pollinating other protocols than their original protocol and from there on to new protocols. While most networks started with their official bridging solutions (ShuttleFlow — Conflux Network, Rainbow Bridge — Near Protocol, Avalanche Bridge — Avalanche) for mainstream assets, the ever-increasing need to bridge even more assets at a faster pace leading to the rise of decentralized 3rd party solutions (cBridge, Multichain, Connext, PolyNetwork).

Liquidity Fragmentation — What is it, and what problems does it cause?

The availability of cross-chain bridging solutions is promising for DeFi. However, it often leads to a fundamental problem that permissionless layer-1s need to avoid: liquidity fragmentation, especially in the early stages. Liquidity fragmentation occurs when different cross-chain protocols cross-chain the same asset A from the origin chain to the destination chain via their own mint & burn mechanism, leading to multiple versions of an asset on the destination chain A1, A2, A3.

To better understand why the mint & burn mechanism leads to liquidity fragmentation, we must understand how it works.

I — Bridging assets from origin chain to destination chain with one bridge protocol:

1) User sends origin asset Aoc to smart contract on origin chain of Bridge Protocol.

2) Bridge Protocol locks the asset Aoc of user in smart contract on origin chain.

3) Bridge Protocol’s smart contract on origin chain communicates with Bridge Protocol’s smart contract on destination chain that the asset Aoc is locked.

· Locking is necessary on the origin chain to prevent double-spending

4) Bridge Protocol’s smart contract on destination chain mints destination asset ADC

5) Bridge Protocol’s smart contract on destination chain sends ADC to user.

II — Bridging assets from destination chain back to origin chain with one bridge protocol:

1) User sends destination asset ADC to smart contract on destination chain of Bridge Protocol.

2) Bridge Protocol burns the asset ADC of user in smart contract on destination chain

· Burning is necessary on the destination chain to make sure the asset is removed to prevent double-spending

3) Bridge Protocol’s smart contract on destination chain communicates with Bridge Protocol’s smart contract on origin chain that the asset ADC is burned.

4) Bridge Protocol’s smart contract on origin chain releases origin asset AOC.

5) Bridge Protocol’s smart contract on origin chain sends AOC to user.

The figure below is a simplified representation of how mint&burn works as described above:

Because the smart contracts on the destination chain of various bridge protocols are different, each smart contract’s minted destination chain asset is different. Multiple bridges create different assets representing the same asset on the origin chain.

Multiple representations of an origin token on the destination chain are the main reason for liquidity fragmentation. Liquid fragmentation leads to unproductive but necessary choices for users. It also creates numerous liquidity pairs on AMM Dexes of essentially the same LP, resulting in higher price impacts.

The chart below by The Block shows the fragmentation of BTC on the Ethereum network:

Liquidity Fragmentation — How to avoid it with collaboration?

Since each cross-chain protocol deploys its smart contracts for the mint & burn mechanism, liquidity fragmentation seems inevitable, or one bridge has the monopoly for a particular chain resulting in lower levels of decentralization. Luckily, the great minds behind Celer cBridge and Multichain have come across this problem, and both found a solution that requires collaboration:

Multi-Bridge-Compatibility: a token smart contract on the destination chain that allows multiple bridging protocols to mint and burn the token to enable the compatibility of multiple bridges.

cBridge refers to it as the Open Canonical Bridge and Multichain as Co-Mint; from a high level, Multi-Bridge-Compatibility requires the owner of the token smart contract on the destination chain to enable multiple bridge protocols to mint and burn the asset. The token smart contract on the destination chain (e.g., USDT / USDC) needs to add Role-Based-Access-Control and define the circumstances a multiple token bridge’s smart contracts can mint and burn the same token. In the token smart contract, the following must be defined:

‘minterRole’ — an account that has the role of minter

‘mintCap’ — defining a cap on the max amount an account with minterRole can mint

Depending on how much the minter account has minted or burned via the token smart contract, the account will have a ‘mintSupply’ balance equal to or smaller than the set ‘mintCap’ and equal to or larger than 0. ‘mintCap’ makes sure that the additional minter cannot mint or burn limitless.

To better understand how different bridges can jointly mint one token on the destination chain, let’s have a look at the new minting process:

I — Bridging assets from origin chain to destination chain with multiple bridge protocols:

1) User sends n-amount origin asset Aoc to Bridge Protocol 1’s smart contract on origin chain.

2) Bridge Protocol 1 locks the sent asset Aoc of user in smart contract on origin chain.

3) Bridge Protocol 1’s smart contract on origin chain communicates with Bridge Protocol 1’s smart contract on destination chain that the asset Aoc is locked.

4) Bridge Protocol 1’s smart contract on destination sends a message to the Token Smart Contract requesting minting of n-amount ADC and sending it to user.

5) Token Smart Contract checks whether Bridge Protocol 1’s destination smart contract has ‘mintRole’ and sufficient ‘mintSupply’ for the requested n-amount.

6) After a successful check in #5 the Token Smart Contract mints destination asset ADC.

7) Token Smart Contract sends ADC to user.

The above process is the same for all bridge protocols, and the figure below is a simplified representation of how multiple bridges can mint the same token concurrently:

An ecosystem relying on a single cross-chain solution limits the security of an entire ecosystem to a bridge. It creates a highly dependent ecosystem on one cross-chain provider, leading to Vendor-Lock-In. Whether the monopoly is reliable, it dictates the user experience from UI/UX to fees, future feature support, or additional integrations for ecosystem dApps.

Permissionless networks should welcome innovation and thrive on collaboration!

Multi-Bridge-Compatibility gives ecosystem users a choice that no single point of failure can cause interoperability issues, whether congestion, service-stop, malicious activities, or technical difficulties, all without liquidity fragmentation. Because Multi-Bridge-Compatibility allows the smart contract owner to set the quota (‘mintCap’) other bridges can mint; when the non-owner bridges get hacked, the risk exposure is reduced from the total supply or even infinite minting of the token to the set quota.

In conclusion, we’re excited to have partnered with the two industry-leading bridge protocol with proven-track records cBridge and Multichain to eliminate liquidity fragmentation of cross-chain assets from the beginning of eSpace!

About Celer Network

Celer is a multi-chain operating system that allows the various application logic, liquidity and states, normally segregated across different chains, to communicate with one another and enables seamless inter-chain composability for dApp developers and projects. Developers can build inter-chain-native dApps using the Celer Inter-chain Message SDK with efficient liquidity utilization, coherent application logic, and shared states. Users of Celer-enabled dApps will enjoy the benefits of a diverse multi-blockchain ecosystem with the simplicity of a single-transaction UX from a single chain.

Follow Celer Network:

Website | Telegram | Twitter | Github | Discord |

About Multichain

Multichain was born as Anyswap on the 20th July 2020 to service the clear needs of different and diverse blockchains to communicate with each other. Multichain is now the leader in the cross-chain field, with a rapidly expanding family of chains (currently 39) and bridges (currently 1781). Its sustained daily volume of more than $200 million, its Total Value Locked in excess of $6 billion and its thousands of daily users are testament to its popularity and security.

Follow Multichain:

Website | Twitter | Telegram | Medium | YouTube

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