Cross-chain is not a strange concept to many DeFi investment brothers. However, up to now, this product segment is still not too “hot”. So why is traveling between chains (which seems natural) not so attractive at the moment? And what are the future potentials of Cross-chain? Let’s find out in today’s article!
First, let’s take a look at the barriers in terms of products and techniquesto see if there are any untapped cross-chain knots.
Safety and security
The security issue was mentioned in an article by Vitalik Buterin, when 51% attack happen over 1 chainmay lead to domino effect at the other end of the bridge.
> See also: The reason Vitalik Buterin doesn’t believe in cross-chain solutions
In addition, we are not too familiar with many exploits related to each bridge product. These errors are often not because of the specificity of the cross-chain arrayhowever it invisibly worsens the image of many products in this market segment.
Most of the errors in the cross-chain array come from mistakes in setting conditions in the contract, which can be found in other product areas. But with the voices and great influence from Vitalik, and the fact that exploits appear on social networks often associated with the word “cross-chain”, users hide their hands when talking about the bridge from chain A to chain B.
There are a few cases such as Wormhole, Ronin, Multichain, Synapse, etc. Recently, we have had attacks related to Li Finance or Rainbow Bridge. We also made a podcast episode to share about this issue, if you are interested, you can listen to it below!
>> Listen now: DeFi Discussion ep.41: Why are cross-chain solutions so often attacked?
Ready to talk about Buterin, personally, I would like to emphasize that I personally think Buterin’s statement partly “submerges” the bridges from ETH to external chains, and indirectly Shill for L2 solutions. . The founder of Ethereum believes that only bridges from the Ethereum Mainnet to Layer-2 are guaranteed to be secure.
Differences in infrastructure structure
The majority of popular blockchains Currently such as BSC, Avalanche, Fantom, Celo, …using the EVM . system (Ethereum’s virtual machine system). These blockchains use the same infrastructure Solidity language to develop smart contracts.
But 2021 is the year of a lot of alternative blockchains and mostly using virtual machine systems other than EVM. Besides, they also use a smart contract language other is Rust.
>> Listen now: DeFi Discussion ep.37: Decrypting the Ethereum Virtual Machine (EVM) – An “impregnable” digital fortress?
This generally creates limitations in the connection of chains. However, many emerging blockchains have come up with the main solution building “buffer zones” – ie EVM solutions for your chain. In a nutshell, this is a chain connected to the original chain, using the security of the original chain, but using Ethereum’s EVM virtual machine system to facilitate the development of Dapps in the ecosystem.
These solutions include Polkadot’s Moonbeam, Near’s Aurora, IBC Cosmos’ EVMOS, and possibly Solana’s Neon soon.
However, the limitation is not without arising, as is the case with EVMOS in recent times. A small bug caused the Claim airdrop to malfunction, duplicating data between the IBC and EVM chains. The EVMOS team then had to suspend chain operations and then re-deploy the airdrop at the end of April 2022.
Another thing that is also very troublesome for users, is liquidity. Most cross-chain transaction pools often have quite significant slippage.
Pools connected to the Ethereum chain have thicker liquidity, however, in return they suffer from extremely high gas levels at the Ethereum bridgehead. With the new chain and few people travel, supply from the side LP (Liquidity Provider) will also be lesscausing liquidity problems increasingly more serious.
Most of the bridges are still using the system Wrapped-Token, roughly understood as a certificate, instead of the original token version. With this mechanism, there will be a third party standing out, locking the token at one end of the bridge, then minting a “Wrapped Token” representation at the other end of the bridge.
In this way, travel will be fast, independent of liquidity, but in return, it will heavily dependent on third parties, thereby leading to the problem of “Decentralization”.
In addition, these token standards are also random, depending on the naming of each product, making users extremely “disoriented”.
I believe that there are still many other technical problems, but if I talk to them all, the article will be very long and very heavy. So, I will move on to analyzing aspects from the business model!
Problems from the business model
Enough talking about technical barriers, now let’s turn to the token story!
Token lacks application
First, it’s easy to see the bridge project token very few usecase and mostly used as a paid tool.
Some projects will have a solution to use the transaction fees collected to buyback and burn tokens. However, in general, if the barrier to travel is too great, it can cause decrease in revenuefrom which turn demand to embrace bridge project tokens It will be from there weakening. Here is a look at Bridge Wars – the battle between bridges and the technologies that projects provide.
for bridge tokens case too since no DAOs would want it only token utility could be fee sharing
but i believe bridging is going to be commoditized and bridge fees will get to 0 in a year
if that’s the case fee sharing too becomes irrelevant
— chishee (@divdotvc) March 15, 2022
“The bridges will be the same, as DAO institutions will not only want their token application to stop at sharing transaction fees. However, I believe that transaction fees between bridges will gradually decrease to zero in the next 1 year. If this happens, it makes no sense to use tokens to share transaction fees.”
If you are interested in the application situation of tokens for voting – voting in DAOs, you can see more in the article below!
> Watch now: Voting – Retroactive hunting opportunity with just “one small action”?
Design of cash flow flows into a “dead end”
After the stage of attracting buying power, the money flowed into the token, projects face the next problem of value transfer. This is not only the cross-chain array, but most other projects are almost “out of ideas” and are constantly implementing the veToken model.
> See also: Compare stkToken, xToken and veToken – Which is the optimal tokenomic?
And as I have shared, veToken is not a model for all types of projects. Not everyone who put the whole framework of veToken in can be successful in a short time.
What future for cross-chain?
With the analysis from the above sections, I personally have drawn a few important points as follows. And note, I am not a “Financial Advisor” or “Candle Expert”, so all the content of this article is for informational purposes only, personal perspective and should not be considered investment advice. .
First, I believe The potential of cross-chain is still huge. Simply because the current infrastructure still has a lot of bugs (leading to exploits), but it This means that there is still room for technological solutions to develop.
Besides that, the need to travel between chains is huge. This is because the CEXs that support the transfer portal do not have many assets, require KYC, operate quite a lot of steps and also limit the amount of deposit and withdrawal according to each KYC level.
Second, Cash flow into these products is still there. For example, FTX Ventures and Alameda are eager to play LayerZero – Stargate. Or Binance Labs is also located in Multichain or is ready to inject money for Ronin to fix the damage.
In the end, it’s Competition dynamics between products are still very strong. I don’t believe there will be a single Winner, simply because cross-chain has the same Trillema problem as Layer-1s. It will be a battle where each product will have its own strengths and weaknesses, thereby helping the market maintain its development momentum. Take a look at how actively Ethereum has evolved since the day there were other L1 names competing.
And that’s what I’m seeing in the cross-chain market. Don’t forget that you will still have a lot of retro hunting opportunities in this product segment! Connext, Li-Finance or Hop Exchange keep mentioning this keyword. And because of that, this market segment is expected to have many more hits in the near future.
And this post is long, see you in the next posts. Hope the above information brings a lot of value to you!
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