Introducing Mitosis: The Modular Liquidity Protocol
TLDR:
1. DeFi is expanding from Ethereum L1 to multi-chain
2. The current cross-chain liquidity is unprepared for this transition
3. Mitosis introduces modular liquidity by making cross-chain liquidity scalable and composable
Introduction
As of February 2024, ~60% of the total value locked (TVL) in decentralized finance (DeFi) is in Ethereum L1. While this is an objectively significant lead, the DeFi TVL composition regarding chain diversification has come a long way. We expect more capital to flow into L2 scalability solutions like Arbitrum, monolithic ecosystems like Solana, and, soon, modular blockchains powered by Celestia and EigenLayer.
And here’s our logic flow. High composability is a core ethos and value proposition of cryptocurrency, and it’s only natural that capital flows into chains that offer high composability at a lower cost. Intuitively, connecting those chains for seamless asset/message transportation becomes crucial in an increasingly multi-chain world.
This introduction post is about how cross-chain liquidity is vital for connectivity in the upcoming multi-chain, modular DeFi era, and it also briefly talks about how Mitosis solves the scalability problem of cross-chain liquidity.
Digital Money’s Modular Expansion
Using smart contracts to operate financial products is the core value that DeFi brings to the table, especially in terms of composability. DeFi can maximize composability via complex, creative strategies implemented by smart contracts, unburdened by traditional finance’s legal and bureaucratic hurdles. Naturally, the maturation of the DeFi market has been about further optimizing composability. In other words, digital money is bound to flow into positions that maximize the crypto asset’s composability, i.e., its capital efficiency.
Derivative token is the prime example of maximizing the composability of crypto assets. By tokenizing an asset and creating its representation, derivative tokens can become liquid financial instruments that retain multiple layers of yields, utilities, and rights. For example, Lido’s $stETH is a liquid asset that tokenizes the $ETH staking position, providing its holders the staking rewards while retaining the characteristics of a digital asset, such as fungibility and transferability. Liquid Restaking, spearheaded by LRT protocols, imbues staked $ETH further composability by adding an additional yield layer in return for extending Ethereum’s economic value to power other use cases through Actively Validated Services (AVS).
Where derivative tokens are headed next is multi-chain. Innovation in building new chains (e.g., EigenLayer, Celestia) sets the stage for more tailor-made chains with better transaction economics, financing, and yield opportunities. Again, money flows into positions with maximized capital efficiency. L1 assets like $ETH are already used as collateral across multiple EVM and non-EVM blockchains. Derivative tokens are the next logical step. They are bound to exist on multiple blockchains and applications to extend their yield stack to optimize holders’ gains.
Mitosis: Making Cross-Chain Liquidity Scalable and Composable
A crucial prerequisite for DeFi’s multi-chain expansion is a well-functioning cross-chain protocol that facilitates asset and message transfers between blockchains.
Today’s cross-chain landscape revolves around protocols like Stargate and Across that serve the cross-chain needs within the Ethereum L1/L2 ecosystem. LPs share the protocol fee revenue without further utilization of locked assets, chain connectivity is retained and updated in a permissioned fashion, and proprietary trust assumptions guarantee security for each solution. This current setup can and should be adjusted to adequately serve the upcoming cross-chain demand in the multi-chain era.
The key is making the cross-chain liquidity scale with the entire DeFi ecosystem and imbuing asset composability to the locked assets to make it worthwhile for the LPs.
Mitosis aims to make this happen in three aspects:
1. Capital Efficiency: Unlock the potential of cross-chain liquidity
The only use case for today’s liquidity network is cross-chain transfer. Liquidity providers lock their liquidity to receive the revenue from the cross-chain asset transfers. While this should remain the fundamental use case of cross-chain liquidity, the lack of further utilization can make cross-chain LPing less attractive than other DeFi use cases. This can pose a severe limitation because a healthy amount of liquidity is required to serve the upcoming high demand for cross-chain transactions between modular blockchains.
Mitosis makes cross-chain LPing more attractive by making it liquid. Mitosis LPs receive derivative tokens that are 1:1 convertible to their locked assets. LPs can use these derivative tokens to participate in various DeFi applications on the supported Ethereum L1 chain and L2 rollups, essentially enabling LPs to let their cross-chain assets work for additional yield on top of the default fee sharing.
Mitosis LPs can also seamlessly import their derivative tokens to the Mitosis chain. The Mitosis DeFi ecosystem is our proposal to redefine cross-chain transactions as we know them, and it replaces the legacy chain-to-chain execution with a highly efficient method of using the derivative tokens on the Mitosis chain, guaranteeing instant finality.
- Example 1: A cross-chain transaction of swapping an Asset A on Chain X to an Asset B on Chain Y can be completed with instant finality via a transaction between derivative tokens of A and B on a DEX on the Mitosis chain.
- Example 2: Lending an Asset A on Chain X to borrow Asset B on Chain Y can be completed on the single Mitosis chain by lending A derivative token to borrow B derivative token on a lending protocol app on the Mitosis chain.
2. Interoperability: Permissionless chain integration for versatile chain connectivity
Contrary to the blockchain industry’s ongoing modular and permissionless transition, today’s cross-chain interoperability remains permissioned and siloed. Liquidity networks can only service the chains integrated by their underlying arbitrary message bridge (AMB) solutions. This results in a subordinate structure where chains depend on the permissioned AMB connectivity for providing cross-chain liquidity to their users. This interoperability setup lacks the scalability fit for serving the high cross-chain demands of the numerous upcoming modular blockchains.
Mitosis’ take on cross-chain liquidity is built on permissionless interoperability, the core ethos of its strategic partner Hyperlane. Anyone can quickly deploy the Mitosis smart contract and connect to other modular chains via a fast-track governance process on Mitosis. By liberating liquidity from the subordinate structures of AMB solutions, Mitosis secures sovereignty and takes cross-chain interoperability up to par with the ongoing modular transition.
3. Security: Protocol security that strengthens with TVL growth
Today’s cross-chain security does not scale with the locked LP assets it’s supposed to protect.
For solutions secured by AMB operators, there’s a mismatch between the clearly visible TVL and the opaqueness in the penalty that the operators must pay for acting maliciously. For solutions secured by PoS chains and governance tokens, the staked token amount inevitably sets the TVL’s growth cap, because the PoS node operators are incentivized to profit from exploiting the protocol once the economic security threshold is breached. In today’s cross-chain protocols, accountability is dubious, or their own security measures ironically hinder the growth of protocols.
Mitosis adopts a crypto-economic security structure that becomes more robust as the protocol TVL increases. On top of the Mitosis chain’s PoS security operated by a trusted validator set, Mitosis plans to leverage restaked $ ETH’s security to validate cross-chain messaging. Also, cross-chain LPs can opt to provide their derivative tokens to secure the Hyperlane-powered cross-chain messaging and earn Mitosis governance tokens as a reward.
SOON
The Mitosis team is working with the following milestones on schedule:
- Closed Testnet with a selected group of validators (completed in December 2023)
- Expedition: Mitosis cross-chain LRT campaign (very soon!)
- Public Testnet (Q2 2024)
- Mainnet + TGE (Q3 2024)
Please follow our journey and provide your thoughts on our Discord and X. We’ll run regular AMAs & podcasts and provide other essential updates to keep you in the loop. For those interested in how Mitosis works, take a deeper dive with our technical documentation.
