Portal Network: The Gateway to HyperBitcoinization

We have yet to enter the era where Bitcoin becomes recognized as a global currency and the generally accepted medium of exchange.

Assertion 1: Hyperbitcoinization, a speculative attack on fiat, requires that Bitcoin go through a series of speculative cycles like we’ve seen in 2012, 2017, 2020/21, each one being successively larger than the last. For the mechanics of price spirals in Bitcoin and crypto, see this.

Assertion 2: Until the era of Hyperbitcoinization arrives, today’s primary application for Bitcoin and cryptocurrencies is for trade and the exchange of value between assets on different blockchains (“Global Seamlessness”).

Assertion 3: This need for cross chain exchange and contracting will be accelerated by emerging blockchain technologies and structures such as Web3, NFTs, DAOs, and those yet to be imagined use cases.

Barriers to HyperBitcoinization:

It’s ironic that the technology of global seamlessness has no seamless exchangeability with other decentralized crypto assets.

Until now, the significant driver of trading volume in the crypto landscape — but also a significant source of risk — are centralized exchanges. And the risk to users is exacerbated when so-called “cross-chain bridges” and “cross-chain liquidity networks” are involved. These suffer from overcomplication, high centralization, and risky & costly synthetic replication (and re-replication) of finite assets.

1. Custodians, even in so-called decentralized networks, are now a necessary intermediary for exchanging assets and contracts across chains.
2. Cross-chain protocols and communication layers still pose security threats. The majority are overly intricate and hide their dependencies on centralized, cross-blockchain message passing, making it impossible to ascertain their security status. Hidden software and game-theoretical risks, lack of transparency, dependence on synthetic assets, among others, are ubiquitous.
3. The cross-chain user experience is more deceptive than straightforward, hiding complexity rather than truly illustrating the associated risks.
4. The cannibalization of liquidity by locking up widely tradable assets in exchange for less-liquid synthetic (or “wrapped”) assets — with some assets remaining siloed within fractured, smaller marketplaces.

Portal’s Decentralized Exchange (DEX) Protocol: Gateway to HyperBitcoinization

The goals of a true cross-chain DEX are:

1. Offer Bitcoin enthusiasts, who are rightly suspicious of custodial solutions, access to the utility of alternative chains.
2. Provide seamless access to Bitcoin’s market-dominant liquidity for users of alternative chains.
3. Reunify the currently siloed liquidity of today’s cryptocurrencies and digital assets, regardless of blockchain or layer.

How can we design a transparent, decentralized, interchain liquidity solution that achieves these goals?

In the coming weeks, you will see more details about Portal’s DEX protocol, network architecture, digital asset design, game-theoretic incentive analysis, and security analysis. The purpose of this introduction is to explain why a network currency is essential for an interchain liquidity network that can interact seamlessly with Bitcoin, and to invite feedback.

Portal Network Connects Different Blockchains with Security, Speed and Low Transaction Fees

Of Networks and Their Self-Fulfilling Prophecies

A network thrives as caravans of users join and forge paths. These networks create value not unlike the geometrically expanding alchemical magic; called “network effects.” In an upward cascade, more demand/supply joining a platform increases the value of the platform, which draws in even more participants from the same side/other side. But there’s more — marketplaces that serve both merchants and buyers are interwoven into this fabric. As Shapiro and Varian, explained in “Information Rules”, the lifeline of the network rests on its cohort. But here lies the rub.

The Centralized Exchanges — A Gilded Cage

Centralized exchanges got as big as they became by capturing the entire value spun by the network’s users. However, the competition in exchange space has been brutal, as users always look to migrate to other exchanges whose trade commissions are cheaper and liquidity is higher, with no stickiness or loyalty. Can this be changed?

Creating an exchange network with real user loyalty requires incentives

Tokens, which can be described as vouchers for network value or “network currencies”, have specific utility within certain networks. Tokens also represent a novel way to distribute network effects, thus potentially increasing the longevity and long-term value accretion to a “Decentralized Exchange”.

What does an interchain liquidity network with the above properties require?

To distribute these network effects to participants and to incentivize them to stay on the network, two things have to go hand in hand — more liquidity invariably leads to increased utility for participants, and increased network value should translate to increased value for participants. Here is how it could work:

1. Liquidity: Users deposit their ETH or BTC into secure contracts, which in return for providing liquidity, provide them with a “yield” or APY.
2. Traders: Users seeking to convert the assets they hold into any combination of ETH/BTC/alts access this liquidity, and pay fees in native tokens
3. Network Maintainers (“Validators”): The stakeholders who maintain and enforce the market structure, secure the network, facilitate upgrades, and promote adoption and expansion get rewarded pro-rata their contributions.

All three of the above categories contribute to the network value, and all three of them capture it.

How do various participants get rewarded?

A simple, but unworkable, proposal would be to just take fees from spot and other markets from traders and distribute them according to some pre-specified rules. This proves futile because it relies on a central entity to create and enforce the rules and an accounting of who gets what, and it will be no different from a CEX in principle.

Validators:

A practical solution is to have a decentralized network of entities with substantial capital stake functioning as validators to maintain the interchain liquidity network. To manage risk, these validators form a dynamic set, driven to grow the network in size and value, and stake their capital tied to the network’s performance.

(The penalty for misbehavior is loss of their invested capital (“slashing”), echoing Bitcoin mining incentives where miners are compelled to prioritize the long-term survival and growth of Bitcoin since their capital investment returns depend on it.). However, slashing can only be done if the capital they put at risk is at least, at all times, equal to or greater than the value of rewards they can obtain by being malicious.

Traders:

The value they receive is increased liquidity, minimized exchange and custodial risk, fast transactions and low slippage.

Liquidity Providers:

For providing liquidity, they receive yield which is dependent on the number and value of transactions and their fees.

To maintain the above equilibrium, anchor smart contracts and complex HTLCs stay on the native chains, while the business logic is abstracted into its own attestation chain, maintained by the dynamic validator set.

A cross-chain liquidity network presents a revolutionary model for coordinating this essential economic activity.

A well-constructed token framework encapsulates the network effect in the value of the token and distributes it fairly among the participants that drive the value of that network.

In the case of the Portal DEX protocol, the network token performs the following functions:

1. Helps scale and brings critical mass to the cross-chain liquidity network by incentivizing liquidity providers.
2. Rewards validators for maintaining the network, based on the only KPI that matters, volume.
3. Allows traders to have access to liquidity and minimizes counterparty risk.

Next in this series, we describe the Network Architecture, Security, and Game-Theoretical analyses, Tokenomics along with the documentation for each component of the network will be published as separate white papers along with links to the corresponding GitHub repos.

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