Envisioning Cross-Chain Bridges at Scale
Underlying Economic Principles for DAPP Network Bridges and the Collaborative Models & Use-Cases They Enable
The DAPP Network brought a cross-chain bridge between EOSIO and Ethereum to life for the very first time in a remarkable show of collaboration and innovation. Cross-chain interoperability is a turning point for blockchain as a whole. dApps, and DeFi dApps in particular, can now transition to more powerful integrated architectures that harness the relative strengths of several chains.
Now that the tech for the bridge has been tested and deployed, it is time to collectively think up exciting new economic models that can help realize the full potential of the cross-chain bridge. This article outlines a starting point for robust economic models that can serve as the basis for strong, sustainable bridges at scale. We’ll also take a look at some of the groundbreaking use-cases that can finally emerge now that the DAPP Network’s DSPs laid the foundations for cross-chain interoperability. These principals and use-cases were brought to light by several DAPP Network community members and should not be seen as a recommendation by LiquidApps.
Staking-Based Model With A Free Market Flavour
When it comes to economic models, staking has garnered massive popularity due to its versatility and ability to align incentives between various factions in the network. Proof of stake (PoS) is a consensus model that incentivizes users to participate in validating transactions by contributing their resources to the network and is implemented in some form across some of the most popular blockchains including Polkadot, Cardano, EOS and Tezos. It also forms the basis of Ethereum’s plan for the much-anticipated ETH 2.0. Many popular DeFi platforms have extended the utility of staking beyond consensus and are leveraging it as a way to bootstrap liquidity for new projects. Users can stake tokens on these platforms as a way to receive an allocation or ‘farm’ a new token.
DAPP Network staking for utility was live from day one and is constantly evolving with new functionalities. The bread and butter of the DAPP Network is staking to DAPP Service Providers (DSPs) in order to access their offered services such as LiquidAccounts, LiquidOracles, and the cross-chain bridge.
It is crucial to bear in mind that different stakeholders will have different interests when it comes to deploying and maintaining cross-chain bridges. When implemented right, staking can balance between node operators, ordinary token holders, validators, and developers. Let’s take a look at several principles that should underpin any staking-based model for cross-chain bridges on the DAPP Network.
DSPs Can Decide On Bridge Specifications (As Usual)
Central to the DAPP Network’s economics is the idea of a free market — that DSPs are free to choose which services to offer and under what service level agreement, while users are free to choose whichever DSPs, or combination of DSPs, to use. DSPs could create a service package that, as always, includes the minimum amount of DAPP Tokens required to operate it and the number of actions that the package provides (QUOTA.) The DSP may also creates a fee model that includes the cost of transactions on the connected chain (i.e. Gas fees in Ethereum) and optional additional fees. Free market economics is expected to play a sizable role in maintaining the cost efficiency of cross-chain bridges. While DSPs are free to set bridge fees at whatever rate they choose, rational users would prefer to support and utilize bridges that, all else being the same, charge them less fees.
Anyone Can Stake Collateral and Provide Initial Liquidity to a Cross-Chain Bridge
Staking DAPP tokens towards the bridge on behalf of the DSP serves the dual purpose of providing liquidity for cross-chain token transfers and as a means of collateral to boost the reliability of bridges. Locking up a significant amount of tokens for large periods of time as collateral is a sensible means of ensuring skin in the game, since it aligns the incentives of the bridge operators and facilitators with the long term interest of the DAPP Network. Ultimately those who put up collateral will be disinclined to put their long-term position at risk. Collateral can either be put up by the DSPs themselves or by the community, if they choose to do so.
DSPs Can Recognize Supporters That Stake to Them As Part of The Bridge Fee Model
Since the reputation and credibility of bridges can be boosted by community staking, DSPs can incorporate a recognition system for their supporters into their bridge fee models. DSPs are free to set fees for operating the bridge, which can take into account the deployment and maintenance costs, while allowing stakers to enjoy a discount on fees for utilizing their bridge.
DSPs Can Join Forces in Setting Up Cross-Chain Bridges
Deploying and maintaining a bridge involves many costs, including infrastructure and network resources, that DSPs must cover. This is one of the reasons why DSPs should consider not to go at cross-chain bridges alone. Rather, each DSP can bring their strengths and relative advantages to the table and create economies of scale together with their fellow DSPs. One DSP can contribute bare metal infrastructure, the other might have a strong developer team that can be put to use, and a third might excel at the business development needed to take these bridges mainstream. Together, they can team up to enable bridges at scale in a way that is both economically viable for them and recognizable for their supporters.
DAPP Developers Can Select Which Bridge To Use
One of the important characteristics of the DAPP Network’s cross-chain bridge is the fact that the architecture was designed in such a way as to be reusable across many bridge implementations. Once the DSPs have set up their service packages, the DAPP developers community can now stake to Service Packages bringing a bridge to life by staking to support bridges. Amongst the packages they can choose, DAPP developers will have the option of choosing those packages that distribute a percentage of proceeds to package supporters. Developers should also weigh up the amount staked to a specific DSP (Proof of Support) as well as fees as a means of communal validation when deciding which bridge to use. When a DAPP developer stakes to a given bridge, not only do they gain access to the functionality it enables but they also boost the bridge’s credibility, which brings us to the next point.
Anyone Can Enable Bridges and Boost Their Credibility Through DAPP Staking
Starting up a bridge is not limited to DSPs only. Anyone can create a cross-chain bridge to allow for the transferring of data and tokens across chains. Once bridges are created, communities can come together to boost the credibility of their preferred bridges by staking DAPP tokens, knowing that dApp developers and users will assess the stake weight of a bridge when deciding which to use. While DAPP Network veterans may be familiar with the DSPs and the reputations of each, newcomers from outside the DAPP Network community may need a benchmark by which to evaluate different bridges. Having both DSPs putting up collateral alongside DAPP token staking from the community provides a key comparative metric that can come in handy for new developers and users alike.
While these five principles should be evaluated and taken into consideration in the foundation for any economic model associated with cross-chain bridges, there are many variations of these principles that could fit different use-cases.
More Than Just Token Transfers: Potential Bridge Use-Cases
The most intuitive use-case of the DAPP Network’s cross-chain bridge is transferring tokens between one chain and another. Despite the fact that cross-chain token transfers make so much sense, the technology to enable such functionality is revolutionary and essential on its own and already demonstrated on the DAPP Network during the Bridge Activation Party.
The technical foundations of the cross-chain bridge can give birth to an exciting new world of interoperable applications, including:
- Multi-chain liquidity pools
- Farming with LP tokens from a different chain
- Reverse-dutch auction market making
- Automated Trading Strategies On Multiple Chains
Multi-chain Liquidity Pools
Anyone, including but not limited to DSPs, can create unique liquidity pools that aren’t limited to a single chain using the cross-chain bridge. Similar to Uniswap pools, these multi-chain pools hold reserves of two different tokens that users can exchange in and out of. However, DAPP Network’s Cross-Chain Bridge now enables those two tokens to be on different chains. For example, a cross-chain pool would enable BOX to be released on EOS when UNI enters the pool on Ethereum As with the case of a bridge, DSPs can choose the applicable fee model for operating these pools. These fees, such as gas on Ethereum, can either be paid in the chain’s native token, or by transferring any other token into a relay and exchanging it for the native token.
DSPs can seed these cross-chain pools with initial liquidity, as well as post collateral to bootstrap the credibility of their pools. Meanwhile, users can either stake DAPP towards the cross-chain relays or provide liquidity to the pools in whichever tokens they hold, and receive a share of the proceeds generated from liquidity seekers.
Farming with LP Tokens from a Different Chain
One of the more popular token distribution models today involves ‘farming’ new tokens with existing Liquidity Provider (LP) tokens. When users add their assets to a liquidity pool, they receive LP tokens in that pool proportional to their contribution. LP tokens earn them a right to fees paid by liquidity seekers, and they can be redeemed for their share in underlying assets of the pool. Certain LP tokens can then be staked on DeFi farming platforms as a way of receiving an allocation of some new token. On Ethereum, where the bulk of farming with LP tokens is taking place, locking up assets in a liquidity pool and staking the resulting LP tokens involves high gas costs that lock out less capitalized users. Thanks to the cross-chain bridge pioneered by the DAPP Network, projects and users can devise all sorts of creative solutions to circumvent this thorny issue. For example, users can send their LP tokens from Ethereum to a high-throughput layer-two and farm new tokens over there. Since the bridge is bidirectional, those new tokens can easily make their way to Ethereum when the need arises.
Reverse Dutch Auction Market Making
Instead of ordinary relays, DSPs can create auction-based relays that utilize the Reverse Dutch method for price discovery with cross-chain capabilities. Users can exchange tokens against a pool that holds two tokens in reserve, with the first token on the first chain and the second token on the second chain. However, instead of setting the price of the exchange continuously as per the Bancor algorithm, for example, the price can be set at discrete intervals based on the number of tokens contributed to the auction. At the conclusion of each interval, users receive a token allocation proportional to their contribution. Fees are deducted from the total amount of tokens received by the user. Since the distribution of tokens happens at set, discrete times, this model could solve the problem of front-running which plagues many decentralized exchanges (DEXs.)
Automated Trading Strategies On Multiple Chains
For as long as financial markets have existed, experts have offered their services in helping clients locate superior returns. The advent of automation and artificial intelligence took this one step further by kickstarting a trend of robo advisors — intelligent algorithms whose job it is to maximize returns by scouting the market for opportunities, crunching the numbers and deploying capital.
Over the last couple of months, these two trends have collided in the blockchain space with the emergence of projects that offer several products and strategies for investors to choose from. With so many liquidity pools, automated market makers and farming platforms to choose from, projects such as yearn.finance (YFI) curate and create yield-bearing strategies for investors.
Depositing assets into yearn vaults, or any other yield-bearing contract on Ethereum, involves a set of complex contract actions that make gas costs unnecessarily high. By taking advantage of DAPP Network’s cross-chain functionality, projects can offer their users an opportunity to stake on a high-throughput layer-two while still enjoying all the automated trading advantages on Ethereum.
DAPP Account has gotten the ball rolling with the DAPP Account DAO (Decentralized Autonomous Organization) which is bringing the ‘wisdom of the crowds’ element to automated trading strategies across multiple chains.
Keeping Incentives Aligned
DAPP Network’s cross-chain bridge is a significant breakthrough that can kick DeFi into a totally new gear. In order for the bridge to maximize its full potential, all the stakeholders involved are likely to move in a similar direction. Users want to see bridges with low fees; stakers want to receive a large percentage of the bridge proceeds; and DSPs want to maximize their revenues. Staking-based models could thus form the bedrock of a wide range of cross-chain bridges, bringing together a collection of DSPs and the community, each contributing their relative strengths and working together towards a common goal. This unique synergy could unlock a new world of exciting use-cases for DeFi as well as boosting the credibility and integrity of the DAPP Network as a whole.
We have enjoyed participating in the discussions the cross-chain bridge has kicked off, and hope we did justice to the ideas that were put forth by the community. Got a perspective you would like to share regarding the bridge’s economic models? Get in touch with the DAPP Network community on Telegram
