Trustless Bridges Can Solve Defi’s Interoperability Crisis, Optimize Liquidity Utilization

By Viveik Vivekananthan, CEO of Swing.xyz

Decentralized Finance (DeFi) has been around for some time now, growing stronger every day. And especially since 2020, it has contributed significantly to the blockchain-cryptocurrency sector’s boom and $2.87 trillion market capitalization. Despite their nascency, DeFi protocols already have a TVL of over $233 billion, as of October 2021. Notwithstanding DeFi’s immense potential and how impressive the above figures look, they hide more than they reveal.

So far, Ethereum (ETH) has been the breeding ground for the majority of DeFi innovations, running everything from simple protocols to metaverses. Although some may see this as a feather in Ethereum’s cap, farsighted scrutiny reveals a severe problem — fragmented and underutilized liquidity. Besides scalability, the general level of interoperability has also been concerningly low on Ethereum. DeFi has amassed deep liquidity, no doubt, but all that value remains isolated in silos, inaccessible for the lack of user-friendly exchange options.

The broader implication of this problem is that blockchains ecosystems — including, but not limited to Ethereum — become ‘islands’ of sorts. And in turn, DeFi is unable to realize its full potential. Therefore, in what follows, we shall explore how problematic this overdependence on Ethereum is and how positive change is possible. In fact, the change has already begun, to be precise, as we shall see.

Liquidity must be fluid, not static.

Ethereum has its limitations, and we will come to that in a moment. But at the outset, it’s important to realize that the network is severely overburdened. For one, it has become almost saturated with dApps that constitute over 99% of its net transaction volume, totaling $120 billion in Q3 2020. And what this in fact does is exacerbate the network’s scalability shortcomings.

Ethereum processes around ten to thirty transactions per second (TPS) and is among the slowest of existing blockchains. In comparison, the Solana blockchain can theoretically process 50K TPS, while payment giant VISA handles 1,700 TPS. Moreover, it currently takes over a minute to confirm new blocks on Ethereum, whereas other blockchains, like Binance and Polygon, have near-instantaneous block finality. To access faster transactions, users need to pay a premium in gas fee, which was as high as $51 in October 2021, following a steep rise of over 23x since June.

Additionally, Ethereum is extremely carbon-intensive and environmentally unsustainable, due to its current Proof-of-Work (PoW) consensus mechanism. Each transaction on the network consumes around 179 kWh of energy. On the contrary, platforms like VISA consume merely 148 kWh for processing 100K transactions.

But even with all these problems, Ethereum hosts around 78% of the ~2,880 dApps that currently exist, with over 86K daily active users. The source of concern is thus obvious. To ensure optimal utilization of the liquidity locked in all these protocols, Ethereum needs to be able to communicate with other blockchains. And similarly, in fact, all of the existing blockchains need the capacity for seamless cross-platform interaction. The outcome for end-users will also be significant, as they will gain access to lower fees and greater efficiency. Plus, the overall scope will broaden manifolds as DeFi markets become integrated in a user-friendly manner.

Cross-chain & trustless bridges: liberating liquidity, unlocking value.

Bridges are essentially a technology to transfer value and data across different blockchains. Though alternative means to cross-chain transfers exist, like wrapped tokens and rollups, bridges are way more efficient. Bridges generally leverage mint-and-burn techniques to function like so—burning or locking tokens on the originating chain, and minting representative tokens on the destination chain. And through this process, they facilitate trustless interoperability.

As such, blockchain bridges can be either centralized and federated or decentralized and trustless. The latter is obviously better-suited to DeFi, mainly on account of being non-custodial and non-intermediated. For security, trustless bridges depend upon distributed staking nodes that validate transactions natively, locally, or externally. NEAR’s Rainbow, Cosmos’s IBC, and Polkadot’s Snowfork are some prominent examples of natively verifiable bridges. On the other hand, Anyswap and Thorchain use externally verifiable bridges, while in Connext and Hop, the verification is localized.

Having said that, and before concluding, it’s imperative to witness trustless bridges in action. Several protocols implement cross-chain bridges already, but presently, consider Swing as an example. The platform uses trustless bridges to aggregate liquidity across blockchains, such that crypto-traders and yield farmers can avail of cross-chain swaps with minimal slippage. In its current phase of development, Swing integrates Ethereum, Polygon, Avalanche, Binance, Fantom, Harmony, Moonriver, Moonbeam, Arbitrum, Polkadot and Solana, among others.

Because of innovations like trustless bridges, liquidity can move freely and securely, from one DeFi protocol to another. And therefore, we can effectively solve the problem of interoperability, without compromising the domain’s fundamental principles: decentralization, privacy, transparency, and above all, the autonomy of self-sovereign individuals. In the long run, this tremendously enhances DeFi’s potential to establish itself as a mainstream alternative to legacy financial systems. That the vision of an interconnected and individual-centric world is no more utopian, is mostly because of cross-chain bridges — a ray of hope that is a genuine need of the post-pandemic hour.

About the author:

Viveik Vivekananthan is the CEO of Swing.xyz. Viveik is a former Apple and Blackberry software engineer. He also founded Silicon Valley Blockchain Consortium. Swing is a cross-chain, multi-chain liquidity and bridge aggregator utilizing blockchain smart contracts, relayers and bridges. The team is a humble and curious group of builders and designers who share a passion for blockchain technology and the new financial use cases it enables.