Bridges and Swaps: The Future of Interoperability

Too many bridges to choose from

Bridges != Swaps

Different forms of interoperability network construction
Above: example of user options if they go to the wrong chain initially.
Note interoperability solutions should also be compared in terms of trust assumptions, transfer times, liquidity, dependency risks, etc. RIP Anyswap and ChainSwap and PolyNetwork. Here’s a good reading on how to reason about bridge construction risks.

Path Dependence

Figure: xUSDC is not equal to yUSDC, an asset is defined by the bridge that brings it over.

Fight over Canonical Contracts

Economics of Interoperability

Predictions for Interoperability

  1. Bridges fighting for market share — with dozens of bridging protocols coming online, there will be a tremendous fight for market share. Initially, bridges will start by connecting under-connected chains and targeting assets that have yet to be bridged. But that market is small and quickly closing; eventually, bridges will play a narrative game — trying to persuade the market that their solution is the “safest”. Or maybe they will start yield farming programs to attract liquidity :)
  2. Speed doesn’t matter for small transactions on bridges because there are “fast bridges” or swaps — Bridges will not compete on speed with each other as there are swapping protocols with significantly lower security that enable users to traverse blockchains faster. A current incarnation is Hop protocol, where users trust an oracle to relay their transaction across a chain. And for small transactions, the risk is relatively low. For large transactions, users may desire to take a slower bridge that has lower fees and increased security. (And if there is insufficient liquidity in the “fast bridges”, users are forced to take slower bridges)
  3. Large users, yield seekers and market makers will be the largest bridge consumers — each blockchain is its own siloed self-contained community. This is especially true when there are stronger native onramps to each chain. The average user does not need to use a bridge. Only yield seekers trying to find the latest farm far out on the risk curve or professionals trying to arbitrage assets and rates across chains.
  4. Interoperability will break crypto’s dependency on atomicity — the magic of transactions on one chain is atomicity. This is why flash loans can exist only in a blockchain environment; if any aspect of the transaction fails, the entire transaction reverts. Look at DEX aggregators. Users either get all the assets they want, or the transaction fails; they don’t have to worry about only getting half. Atomicity does not exist for applications in real life. Smart order routers — the IRL version of DEX aggregators have to build logic to handle exchange connections dropping or transaction failures. Interoperability will force developers to have a different mindset when building cross-chain applications. Now partial failure cases have to be accounted for.
  5. Interoperability aggregators — there are dozens of bridges and swapping solutions. Many teams will attempt to build an aggregator to unify them all. This is a nontrivial technical and UX problem for these teams; you no longer have atomicity :).
  6. Fiat assets will remain centrally issued and only bridged onto new chains — fiat-backed assets such as USDC will be issued directly by CENTRE to other chains. This will also create problems[3]. For the newest chains that are still untested, bridges will bring over fiat-backed assets as issuers will wait for the chain to prove itself.
  7. Bridges are useful if a user already has assets on the destination chain. What is the point of bringing over an asset if the user doesn’t already have the native fee token? Otherwise, the assets become stuck. Users have to acquire the native gas token either through a centralized exchange or a swap protocol. We expect interoperability to potentially abstract gas away or inform users to also swap / bridge over the native assets of the destination chain before bringing other assets over.
  8. Some bridges will collaborate and share a canonical contract to make the UX for developers and users seamless, at the cost of increased risk (have to trust both bridges). Celo Optics is pioneering this. (h/t @pranaymohan)

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Facetious in Blockchain; former @calblockchain, @earndotcom

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Leland

Leland

Facetious in Blockchain; former @calblockchain, @earndotcom

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