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Conflux Network

Scaling DeFi With L1 Bridges

Written by Conflux Network’s DeFi Analyst

Congestion and gas fees on layer-1 blockchains are steadily rising and hitting new heights as decentralized finance (DeFi) continues to grow into the alternative financial layer of the global economy. As the fees related to gas continue to break all-time highs, the initial target market of DeFi users — those who cannot afford traditional financial infrastructure — are now seeing themselves priced-out of DeFi because of transaction fees eating into their profits. Ethereum Average Gas Price is currently averaging $2.50, up from $0.67 one year ago. This is an increase of 239.1% from one year ago.

As the demand and popularity of decentralized applications as a whole increase, higher transaction fees are expected to follow alongside usage. To address this looming issue in the blockchain space, several projects in the industry have now shifted focus to producing scaling solutions that aim to reduce the cost associated with transactions while simultaneously increasing the TPS associated with the underlying blockchain.

As the market currently stands, there are several different methods and attempts at creating the optimal scaling solution for congested networks like Ethereum. The method for nearly all current scaling solutions follow a similar technique: accumulate multiple transactions off of the native chain and then bundle them into proofs that are then registered as one transaction back to the native chain.

While nearly all popular scaling solutions follow the same underlying principles, there are still different approaches to making these solutions as optimal as possible. Source

Rollup technology is currently the most popular scaling solution on the market, and while many have yet to switch, there are a few that have looked at either optimistic or zero-knowledge solutions for their throughput solutions rather than the traditional state channel or plasma scaling solutions. This could be because of the optimizations that rollups have made when compared to its competitors. For example, with state channels, all changes to the state have to be registered through a set of live operators with any updates having to go through a multi-sig. This was quickly discovered to be quite troublesome as the set amount of validators for the network had to maintain availability 24/7 and would pose a threat to the network if they were not available.

The solution to this was sidechains, where assets are moved to a parallel chain with its own consensus mechanism and security. The most popular example of this is SKALE, which now holds over $80M Total Value Locked (TVL), over 3700 delegators from 90 different countries, a clear indicator of the growing popularity of this method of scaling. The main upgrade on state channels was the shift to assets being secured by smart contracts on the native chain while managing to reach high TPS by processing transactions and facilitating wrapped assets on a Proof-of-Stake blockchain. While these sidechains have found popularity with some DApps, they have not become the go-to solution due to data availability, a roadblock that holds back their potential. The data availability problem occurs when sidechains are not able to discover proof-based transaction data that is needed to validate a transaction before it gets processed. Two potential attack vectors arise without data availability:

  • Dishonest full-nodes: A full node propagates an invalid block or transaction to a light node, withholding validation.
  • Block withholding: Full node or light node mines a block but does not propagate to other nodes.

Rollups aim to improve on typical sidechains and the data availability problem. Rollup blocks operate similarly to sidechains but include enough data for nodes to reconstruct and challenge the state, simultaneously creating an incentive-based model for users to maintain the security of transactions and state-changes off-chain. The two most popular forms of rollups to emerge from this scaling solution are Optimistic rollups (OR) and ZKRollups (ZKR), both achieving near 1500 TPS. With OR, contract calls and their arguments are written on-chain, but the actual computation and storage of the contract are done off-chain. While Optimism is ideal for redeployments and smart contract development, ZKRs focus more on transactions and token transfers, this is mostly because ZKR technology lacks EVM compatibility, making it difficult to develop and deploy smart contracts. However, developers still choose to use ZKRs because they can enable users to move assets between chains quicker, have more secure privacy, and find quicker finality on-chain.

While these solutions are great for the current scalability problems faced by blockchains, there are still multiple questions raised by the community and risks posed to the potential liquidity scarcity with multiple off-chain solutions operating on a single distributed ledger. Compared to the Lightning Network on the Bitcoin blockchain, where a single scaling solution has become the market choice for others to connect to and develop on. The small developments and improvements on the Lightning Network from other popular Bitcoin developers such as Blockstream, Zap, Bitrefill all work with Lightning Labs to ensure a smooth transition period when shifting from one scaling solution to another and ensure that finality is processed through Lightning onto the Bitcoin blockchain to make the UX as seamless and composable as possible for the end-user.

The same cannot be said for the emerging layer-2 landscape on Ethereum. With new scaling developments nearly every month on top of proposals for the upcoming ETH 2.0 network, there is now a wide variety of options available to users and DeFi founders all of which are not interoperable with each other which creates growing friction and competition between solutions. With the transition to different non-interoperable layer-2 solutions approaching for projects like Synthetix and dYdX, competition amongst the rising layer-2 protocols could lead to fragmentation of liquidity which would delay or prevent any of these L2 solutions from reaching mass adoption, a critical roadblock to a market built on the concept of composable money-legos.

The growing L2 solution ecosystem can easily optimize TPS and transaction costs but must sacrifice the loss of composability at the expense of efficiency. Source

In the eyes of Conflux Network, the answer to reducing potential fragmentation is through working with several other L1s by building bridges and mesh networks between different blockchains that eliminate the need for finality on the assets origin chain. Blockchain bridges have the potential to be the answer to interoperability and throughput for DeFi projects while opening up new communities and money-legos beyond their original ecosystem. An advantage that cross-chain DeFi has over L2 DeFi is the fact that they can experience the new technologies of other networks while simultaneously growing the liquidity they built on their base chain. This introduces a new concept of programmable liquidity, which instead of fragmentation of assets, opens the door to new opportunities to build TLV that can move across networks through mesh networks and blockchain-agnostic developments.

Since our inception, we have made our ShuttleFlow asset bridge a key priority so that we can provide the infrastructure and tools necessary to create an interoperable blockchain which facilitates free-flowing assets in the most efficient way possible, whether that be through decentralized custody of locked-assets, or the exploration of arbitrary messaging to bridge new asset-types across blockchains. The long-term goal at Conflux Network is to create an ecosystem of bridges that enable the community to develop the concept of money-legos into cross-chain multi-layered liquidity-legos that connect traders and niche-markets currently isolated on one chain. This could one day look like NFTs on Ethereum being used as collateral in Conflux DeFi, or privacy layers finding new use-cases with metaverse gaming layers.

With the need to scale DApps and DeFi becoming more evident as the days go on, Conflux is ready to provide the infrastructure and tools to develop an ecosystem of free-flowing composable money legos, join us at our virtual hackathon with AAVE and Chainlink where we will be funding developers and entrepreneurs who are ready to bring blockchain agnostic DeFi to life in the Conflux Networks ecosystem!

About Conflux Network

The only state-endorsed public, permissionless blockchain project in China, Conflux Network is an open-source, layer-1 blockchain protocol delivering heightened scalability, security, and extensibility for the next generation of open commerce, decentralized applications, financial services, and Web 3.0. Conflux Network is overseen by a global team of world-class engineers and innovative computer scientists, led by Turing Award recipient Dr. Andrew Yao. Fostering entrepreneurship and innovation, Conflux elevates startups and organizations across industries and continents to generate decentralized marketplaces and digital assets for meaningful business and social impact. Founded in 2018, Conflux has raised $35 million in capital from prominent investors including Sequoia China, Metastable, Baidu Ventures, F2Pool, Huobi, IMO Ventures, and the Shanghai Municipal Science and Technology Commission.

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Conflux Network

Conflux is a PoW + PoS hybrid first layer consensus blockchain for dApps that require speed at scale, without sacrificing decentralization.