The Scalability Triplet of Interoperability

TL;DR

• Today’s cross-chain liquidity layer is the bottleneck for blockchain’s modular transition.
• The scalability problem of the cross-chain liquidity layer manifests itself in three aspects: restricted usage of locked assets, siloed network coverage, and constraints arising from security design.
• Mitosis proposes the next-gen cross-chain liquidity protocol fit for the modular era.

The Modular Era We Envision

In the modular era, new networks will flourish, and each will operate in a highly specialized role. Some of them will function as infrastructures, and others as applications. In this imminent future, even the simplest user action will span multiple networks. This translates to cross-network communication on a scale beyond our current imagination. The question is, is the current cross-chain liquidity layer ready for this?

Current State of Interoperability: Fragmentation

The current cross-chain liquidity layer is fragmented. Each protocol supports only a handful of networks and a few activity types. Most cross-chain protocols are confined to one or two ecosystems (limited networks). Bridges only execute cross-chain transfers, relying on DEXs to enable cross-chain swaps (restricted activity types). But why is this a problem? Why not allow each tailored protocol to manage its respective cross-chain activities within its area?

Fragmentation Is a Trouble

Fragmentation in cross-chain liquidity harms both user and builder experiences.

1. Numerous trust assumptions: Users must place their trust in a variety of cross-chain protocols, each tailored to specific networks and activity types. The result is increased risk exposure to users.
2. Slower settlements and greater slippage: Transactions involving multiple protocols have slower settlements and greater slippage than those conducted within a single protocol. Moreover, the fragmentation of liquidity across multiple protocols leads to increased slippage, as each protocol has a smaller volume of liquidity.
3. Excessive resource allocation for connectivity: Builders need to collaborate with multiple protocols to obtain interoperability. Time and talent for such endeavors lead to fewer resources put into building and creating value.

As of today, the impact of cross-chain liquidity fragmentation may not yet be apparent. But imagine a future where hundreds, if not thousands, of new networks, together form one big ecosystem. The demand for interoperability will surge along with the number of new networks, while cross-chain activities will further diversify. A fragmented cross-chain liquidity layer is not fit for this future.

Achieving scalability is the key to solving fragmentation. Depending on its scalability, the cross-chain liquidity layer could either be a bottleneck or a catalyst for the modular era. Let’s then look into what’s preventing the liquidity layer from scaling.

The Scalability Triplet

Restricted Usage of Locked Assets

Current protocols cover only a limited subset of cross-chain activities. Cross-chain activities extend beyond simple asset transfers between networks. They include cross-chain swaps and lending and will diversify further as the modular transition progresses. However, current protocols capture only a fraction of the total pie of cross-chain activities.

• For LPs, restricted usage of locked liquidity translates to lower yields, disincentivizing them from providing liquidity.
• For the ecosystem, it means underutilized liquidity and lack of capital efficiency.

This not only causes fragmentation in the liquidity layer but also makes it hard for each protocol to maintain a healthy amount of liquidity.

Siloed Network Coverage

Cross-chain liquidity protocols can only serve networks supported by their underlying AMB (arbitrary message bridge).

• Lack of autonomy for liquidity protocol: To extend connectivity, a cross-chain liquidity protocol must either wait or incur costs for their underlying AMB to establish the necessary connection.
• Lack of resources for underlying AMB: The effort for establishing a new AMB connection far exceeds that of creating a new network.

The capability to connect to high-potential networks in a timely manner will be the key competitive advantage in the modular era. However, this is unattainable with the current subordinate structure. Furthermore, there is a clear limit in scalability, as it is impossible for an AMB to connect to all networks with its limited resources.

Constraints Arising from Security Design

The security of the current cross-chain liquidity protocol is often not quantifiable and limits TVL growth. The principle of cryptoeconomic security is that the cost of an attack must remain higher than its gain. Thus, accurately quantifying the cost and gain of an attack is essential.

• However, quantifiable security is rare in cross-chain liquidity protocol.
• Even when the security is measurable, the amount of assets locked for security limits the volume of liquidity the protocol can manage.

This leads to a scalability constraint on how much liquidity a protocol can secure.

Sneak Peak to Mitosis

Mitosis proposes a scalable liquidity layer that redefines cross-chain for all participants:

• higher yield potential for LPs
• optimized UX for cross-chain users
• uninhibited connectivity for builders

The innovations include miAssets and the Mitosis Ecosystem for capital efficiency, partnership with Hyperlane for sovereign connectivity, and multi-token PoS for security.

This series will continue with more articles on how Mitosis approaches the Scalability Triplet problem.

Stay tuned!