Cross-chain interoperability
Decentralized finance (DeFi) is a brand new market that has attracted a large number of investors over the last few years. In fact, Ethereum is still the dominating chain within this growing market, accounting for over 60% of total value locked. However, just like every other decentralized storage platform, Ethereum still suffers from the blockchain trilemma, an evolved form of the renowned CAP theorem, stating that a storage system utilizing blockchain can only simultaneously satisfy 2 of 3 guarantees: decentralization, scalability, and security.
While Ethereum is at the disadvantage of poor scalability, there are alternative networks that prioritize throughput over distributor implementation or security ability. Moreover, several other blockchains are also trying to alleviate the trilemma by improving the consensus protocol from PoW to PoS (e.g., Ethereum 2.0) or developing a Layer 2 solution (e.g., Bitcoin Lightning Network).
All the factors above create a lively ecosystem of blockchains; each chain offers a distinctive set of characteristics with varying levels of gas fee, transaction time, decentralization level, etc. However, this populous blockchains ecosystem encounters a problem called liquidity fragmentation. Most of the popular DeFi applications deployed on blockchains, such as Uniswap, Compound, Aave, etc. However, supporting actions on multiple blockchain systems cannot compare and conduct cross-chain operations. This restriction hinders the flow between chains of cryptocurrencies and other digital assets, rendering the market’s variety above scarcely helpful. Therefore, to help users utilize the variety in the DeFi markets, a tool capable of comparing and interacting between different blockchains is demanded.
Cross-chain bridges
With the extensive growth of the DeFi market in the last few years, numerous cross-chain bridges have been created. Cross-chain bridges are platforms that allow transferring information from one network to others, thus solving the problem of cross-chain interoperability.
There are several approaches to building a cross-chain bridge. Some are created to only transfer a specific asset. For example, Bitcoin, the first and most popular cryptocurrency, has several ”wrapped” ERC-20 versions of it, such as wBTC, tBTC, or renBTC. These “wrapped” BTC can be minted or burnt whenever a user sends/withdraws their Bitcoin to a custodian wallet, thus enabling the migration of BTC between the Bitcoin and Ethereum network. The Interlay project can also transfer BTC cross-chain but to Polkadot instead of Ethereum.
Some bridges can support the exchange of cryptocurrencies and digital assets. However, some also promote transmissions like state data or validation information between different chains, providing substructures for developing decentralized applications (dApps) across multiple networks.
Other bridges, while they can transfer different types of cryptocurrencies, are chain-specific, meaning they are dedicated to a certain chain. These bridges are usually developed by major blockchains, such as Binance (Binance Bridge Project), Polygon (PoS), or Avalanche (Avalanche Bridge), which can transfer information from only the source network to other networks. Other remarkable independent projects in this category are Rainbow Bridge for Ethereum, Aurora & NEAR, or Portal by Wormhole (bridging between Solana and other chains).
Many services provide bridging solutions that can conduct cross-chain operations on multiple asset types between various blockchains, notably THORChain and Multichain. However, these platforms cannot handle applications other than asset exchange, like transmitting state data or validation information.
Lastly, the type of bridge that has the broadest use case is a generalized bridge. Generalized bridges are platforms that can transfer various types of information, including assets, contract calls, proofs, or states. Their operations are also not limited to specific chains or applications, but they can communicate between a diverse field of separated networks.
This liberation from generalized bridges, however, does not come without costs. Most generalized bridging infrastructures adopt the method of building a 1-to-1 bridge between each pair of chains, which is not ideal for scalability, as any new chain being added into the system will require N more connections (with N being the current number of chains served by the bridge). Furthermore, the transparency of bridge services is also frequently brought into question, as it is difficult to have a clear and public record of the process of transferring assets between networks. The fact that most generalized bridges are not an integral part of any blockchain system also constitutes higher transaction fees and latency for customers.
There are a few platforms that are already addressing the above problems in order to expand the usability of the blockchains ecosystem for end users. One of such products is the Router Protocol, a generalized bridging platform that enables communication across blockchain networks. While focusing on the exchange of assets with stablecoins as a medium, Router also supports the transmission of arbitrary messages, allowing dApps to seamlessly run on multiple chains with ease.
Router Protocol
Router Protocol is an extensible bridging platform founded in 2020, aiming not only to enhance the cross-chain interoperability of the current DeFi market but also to improve several aspects of the contemporary cross-chain bridge solutions, especially in scalability and transaction expense. Router Protocol can serve both end users in terms of exchanging digital assets from one chain to another and dApps developers as a platform for creating multichain dApps.
The Router’s method of bridging blockchains has no 1-1 connections. Instead of using a set of routing nodes, each node is configured to be able to both listen to and write on all chains in the system (thanks to a bridge contract installed on each chain). This creates a super-mesh of blockchain networks, where all chains can communicate with each other through a series of routing nodes. With this approach, whenever a new chain is integrated into the system, it only requires configuration for the new chain to be added on Router nodes, without the need to construct a new connection for every new pair of chains. Thanks to this innovation, despite being a young project, as of July 2022, Router Protocol has already integrated nine EVM-based chains, including Polygon, BSC, Avalanche, Fantom, Arbitrum, Optimism, Ethereum, Crosnos, Harmony, with the latter six were added in a mere span of 4 months.
In case of moving cryptocurrencies and digital assets across chains, Router Protocol follows the widely-used paradigm of being the transactions validator. When a user wants to migrate or exchange a token from a source chain to another chain, the Router will first lock that amount of token on the source chain. Then, on the destination chain, the user-desired coin can be either minted (in case that coin is associated with Router, such as ROUTE or DFYN) or swapped with a similar amount of stable coin (withdrawn from a liquidity pool on the destination chain).
In addition, Router also implements several improvements that can provide end users with a smooth experience at the lowest expense. Firstly, it takes advantage of a proprietary Pathfinder algorithm that can detect the optimal path for exchanging assets regarding transaction fees. Secondly, one of the most phenomenal abilities of Router is liquidity aggregation. While many bridges have to install individual liquidity pools on every chain inside their system (which might inevitably lead to low liquidity in some pools), Router can simply access existing AMMs (Automated Market Makes) on the destination chain (or sometimes on the source chain), then compare them using the Pathfinder algorithm for the best exchange rate and gas fee. And to make the transaction more assuring for participants, Router uses Dfyn - a multichain AMM service - as its emergency liquidity provider. In normal circumstances, Dfyn also competes with other native AMM platforms to become the best candidate for the Pathfinder algorithm. However, in case there is not enough liquidity on a certain blockchain, Router can resort to Dfyn’s flexible liquidity pools to ensure that the transaction still succeeds. Furthermore, users are also allowed to freely select the kind of token to pay for the service fee, either with the AMM native token, with USDC, or with Router’s associated tokens (ROUTE and DFYN).
Besides the main target of transferring assets, the Router team also provides cross-chain transmission of messages and function calls for dApp developers. Router JS SDK and the Assets-Swap API present any Web3 project with the entire functionality for cross-chain transactions. Furthermore, the Router Widget is a complete module including both UI and back-end of a cross-chain swapping service, making the integration process of integrating Router into dApps an effortless task.
The above features, combined with many other useful advancements, make Router an outstanding project amongst numerous other bridge services.
Dfyn
As stated earlier, Router, besides serving as a separate cryptocurrency exchanging tool, can also support other decentralized platforms as the base infrastructure, such as Dfyn - a promising multichain DeFi platform. Debuted in late 2020 as a DEX & AMM on the Polygon network, Dfyn has evolved into an ecosystem of multichain applications with the ultimate mission to bring about a fast, cheap, straightforward, and reliable multi-blockchains market for the end users. The ecosystem currently consists of three modules: Multi-chain AMM & DEX platform, Cross-chain DEX, and Cross-chain launchpad.
Dfyn’s multichain AMM & DEX platform grants users the ability to exchange assets with liquidity pools on various blockchain systems, thanks to a series of nodes installed on both Layer 1 and Layer 2 blockchains. What makes Dfyn’s AMM stand out amongst many other liquidity providers, both single or multichain, is the ability to migrate assets between liquidity pools on different networks, alleviating the problem of running out of liquidity. Currently supporting coin exchanges on Polygon, Fantom, Arbitrum, and OKExChain, the Dfyn team is working tirelessly to expand their service to other blockchain networks.
In addition to the multichain DEX, Dfyn has announced a Cross-chain DEX feature, utilizing Router’s Cross-chain Liquidity Protocol (XCLP). This provides access to the Router’s mesh of blockchain networks, expanding the scope of the user’s action from the four natively supported chains to the mesh of connected networks in the Router’s ecosystem. Moreover, besides exchange services for investors, Dfyn also supports blockchain creators with their Dfyn Launchpad project. Dfyn Layer 2 launchpad presents an easy-to-use development environment for creators to launch their tokens on multiple chains, initiate farming plays, and design complex Layer 2 IDO strategies without worrying about ETH’s high fees.
With the target of a satisfying experience for users on multiple chains, Dfyn was firstly deployed on the Layer 2 sidechain Polygon, with the cross-chain solution provided by the Router team. This comes with many advantages. Firstly, the integration of Layer 2 chains like Polygon on top of traditional Layer 1 chains helps Dfyn avoid Ethereum’s lack of scalability, decreasing the transaction’s latency. This, combined with smart routing technology from the Router network, can drastically speed up transaction time (declared by the Dfyn team to be at least 10 times faster). Low transaction fees are also another exceptional point of Dfyn, resulting from its smart routing technology, and the gas optimization technology from Biconomy can significantly reduce the amount of gas fees that users have to pay. Dfyn even guarantees gas-free transactions on their mother chain Polygon. And finally, the implementation of Router Cross-chain Protocol helps seamlessly flow of assets between Dfyn’s liquidity pools on different chains, making the prospect of a chain running out of liquidity becomes unlikely.
As of August 2002, Dfyn has reached $300 million in TVL, with over $3 billion processed in trades. The developing team has also announced Dfyn V2, with plentiful new features that are promised to benefit users even more, such as a Request-for-Quotation (RFQ) model for swapping, or new implementation of liquidity pools and staking vaults.
Conclusion
The booming of the DeFi ecosystem is proved to be both an opportunity for consumers and also creates a complication in the form of liquidity fragmentation. While several cross-chain services have been developed to solve this predicament, Router, and Dfynstill, with their collaborative relation, combined with a unique approach that puts the comfort of end users as their top priority, still emerge as an effective cross-chain interoperability solution. Although the amount of blockchains served by both platforms is still somewhat limited, the teams are doing their best to expand their platforms, trying to make participation in the DeFi market an effortless and secure task for the mass users.
References
- Dfyn, the gasless multi-chain AMM, medium.com, accessed 9th August 2022.
- Blockchain Bridges: Building Networks of Cryptonetworks, medium.com, accessed 8th August 2022.
- Router Protocol whitepaper, docs.routerprotocol.com, accessed 9th August 2022.
- Comparing Router Protocol with other Cross-chain infra projects, outerprotocol.medium.com, accessed 8th August 2022.
- Router Protocol: Infrastructure for the Cross-Chain World, messari.io, accessed 8th August 2022.
- Dfyn documentation, docs.dfyn.network, accessed 8th August 2022.
- Dfyn Litepaper, dfyn.network, accessed 9th August 2022.
- Dfyn Exchange is now a Cross-chain DEX — Announcing Router Widget Integration, dfyn-network.medium.com, accessed 9th August 2022.
- Presenting Dfyn V2, dfyn-network.medium.com, accessed 8th 2022.