What’s Needed Now in Interoperability Infrastructure

A look back at the first Cross-Chain Summit and DeFi BTC

In mid-August, the Cross-Chain Group hosted its first-ever summit in San Francisco. The Cross-Chain Summit was designed as a workshop to share ideas and work on common problems in blockchain interoperability. It brought together about 40 of the industry’s leading developers of interoperability infrastructure.

Presented Projects

Four speakers discussed plans for new cross-chain communication mechanisms: Jack Zampolin from Cosmos, James Prestwich from Summa, Matt Luongo from Keep and Warren Paul Anderson from Interledger.

Formatted to encourage open dialogue about their proposed protocols, the presentations elicited detailed Q&A and whiteboard sessions, which was Cross-Chain’s Group’s primary objective.

Warren Anderson discussed Interledger, a tokenless interoperability protocol, designed to facilitate cross-chain payments between BTC, ETH, and XRP.

Cosmos’ Jack Zampolin presented the Inter-Blockchain protocol (IBC), a layer connection protocol that enables secure transfers of fungible and non-fungible tokens, cross-chain contract calls, code, data migration, and collateralization across chains.

James Prestwich introduced Summa’s stateless SPV, a way to lighten and improve BTC relays by only storing block links instead of block headers or full blocks, as previous relay designs have done.

Matt Luongo, Project Lead at Keep, announced tBTC, a joint initiative from Cross-Chain Group, that combines Summa’s work on stateless SPV and Keep’s work developing a random beacon and t-ECDSA keeps.

In the conversations that followed the presentations, the projects themselves were discussed and workshopped, as were broader issues facing interoperable and decentralized cross-chain systems.

Below are two salient topics from those conversations, including perspective from summit participants.

The need for decentralized cross-chain infrastructure

Greater interoperability requires more opportunities to collaborate, an understanding that served as the genesis for the Cross-Chain Summit. For many participants, that goes beyond nice-to-have features and into critical infrastructure for building on existing momentum in decentralized applications.

A recent blog post by Keep Technical Lead Piotr Dyraga on t-ECDSA keeps captures our view on the importance of cross-chain development.

“The interoperability ecosystem has a continuum of blockchains,” said Zaki Manian, head of research at Tendermint, in a conversation after the summit. “Bitcoin is the most primitive, most credible, most objective chain; Ethereum is the early incarnation of a smart chain, with medium credibility; Cosmos/Substrate/Ethereum 2.0/Near Protocol are super programmable but currently low credibility.”

“Projects like tBTC and Cosmos are needed to extend the advantages of credibility and new technological breakthroughs in both directions across that continuum of chains” — he said.

The luxury of isolating oneself, focused on only one chain, will likely no longer be a possibility for application developers. The work and the risks involved in cross-chain interoperability mean this is a world in which teams need to rely on a community of developers.

“Cross-chain communication almost always involves following another chain’s consensus process. If you don’t deeply understand that process, you can’t build cross-chain systems,” James Prestwich said in another conversation after the event. “The consensus layer doesn’t just support DApps, it interacts with them. It’s part of the DApp, and it affects everything from user experience to security. Understanding consensus is critical to effective development.”

The importance of incentives in decentralized systems. tBTC dive-in.

During workshops and whiteboard sessions at the Cross-Chain Summit, the incentives that are designed to motivate participants in tBTC was a frequent topic. Like all decentralized systems, tBTC relies on a delicate balance of incentives designed to attract participants who fulfill necessary functions and to punish bad actors.

Here is a brief summary of the roles defined in tBTC:

1. Depositors

Depositors are users who want to use their bitcoin on other blockchains. They deposit 1 BTC into a smart contract in expectation they will receive 1 tBTC in return, which they will be able to transfer on other chains (ethereum is first) or use in decentralized applications.

2. Signers

Signers hold assets on non-Bitcoin chains and want to earn a return on it. They post their non-Bitcoin coins as collateral for the right to partially custody the BTC deposited by depositors, minimizing counterparty risk.

The signing group is chosen by Keep’s Random Beacon, which operates on proof-of-work (PoW) and reduces group control risk through random group selection. The KEEP work token incentivizes this system, doing just one thing: providing signers with an asset for PoW. Using the KEEP token, signers can opt-in to various MPC protocols, one of which is the t-ECDSA protocol. This diagram in TokenDaily visually depicts the difference between a system with centralized signing control and tBTC’s decentralized signers.

3. Liquidity providers

Liquidity providers make markets in tBTC. If a signer is dishonest or faulty, the tBTC system seizes the signer’s bonded coins and uses them to buy tBTC and burn it. For this to work smoothly, a liquid market in tBTC is necessary. On Ethereum, tBTC will use Uniswap as an on-chain liquidity pool.

Further details can be found in the draft technical specification.

Working on the incentives

In order for this system to work, incentives must be set to attract honest participants in each role. Hart Lambur, the co-founder of UMA Project, an open platform for crypto asset derivatives, was one of a handful of people workshopping different incentives and outcomes, especially for tBTC signers.

“At a very high level, my biggest concern is around the fees being paid to the signers for the work they are doing. My understanding is that under the currently proposed parameterization, the signers are paid 50 basis points (0.5 percent) of 1x BTC for posting 1.5x ETH collateral that is locked for 6 months,” Hart said in a conversation after Matt’s presentation at Cross-Chain Summit. “That fee doesn’t feel high enough to me for the risk the signers are taking with their ETH collateral. If you forget to close an undercollateralized tBTC position you lose your $15k! That’s scary. I would think that rational actors wouldn’t agree to be signers unless the fee was an order of magnitude higher.”

What followed was a discussion about the likelihood that early adopters will subsidize the system by picking up signer responsibilities at this relatively low rate. “My question would be what happens as tBTC grows,” Hart said. “Who steps in as a signer at the 50bps fee level once you exhaust the early adopters?”

Thanks to this and other discussions that took place, a lot of options are on the table now for improving signer incentives. From adjustments to the mechanism design that reduce collateral requirements, to placing bonded funds in a DeFi lending platform like Compound, we’re excited to find the best path forward through collaboration, experimentation, and analysis.

We are interested in your thoughts and welcome you to poke holes and ask us questions, as this is the work in active development.

The first Cross-Chain Summit confirmed a place for the Cross-Chain Group, establishing the need for better collaboration on blockchain interoperability development. At Keep, we’re looking forward to continuing to support and collaborate Cross-Chain Group projects.

A recent blog post by Keep Technical Lead Piotr Dyraga on t-ECDSA keeps captures our view on the importance of cross-chain development. You can learn more about the Cross-Chain Group and tBTC in this CoinDesk article, published after the summit.

We hope you enjoyed the article! Please click the 👏 button and share to help others find it. Learn more about tBTC in its announcement blog post and this podcast by Wyre.

Join us for further conversation about cross-chain communication and interoperability on Twitter and Slack.

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