ViaBTC Capital | Can Interoperability Protocols Change the Cross-chain Market?

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A multi-chain market & Asset security

As it evolves over the years, the blockchain space has become a multi-chain market, with hundreds of thriving public chains, covering Ethereum, Ethereum 2.0, Solana, Terra, Cosmos, Avalanche, and many more. As they compete with one another in terms of ecosystem development, these public chains strive to attract more developers to their ecosystem. Users and developers demand mutual collaboration between different chains that enable seamless asset transfers. Meanwhile, DApps also hope to get deployed on more public chains to capture user traffic and asset liquidity. This huge demand for asset transfer and app development has triggered the appearance of dozens of cross-chain bridges and interoperability protocols.

However, as each public chain has its own unique underlying technical framework, bridging the public chain islands is an extremely expensive, complex, and insecure process.

It was recently reported that Ronin, Axie Infinity’s exclusive side chain, was hacked, and USD 624 million of crypto assets (including 173,600 ETH and 25.5 million USDC) were stolen, which is the most disastrous security breach among cross-chain bridges ever. The hacking incident targeted private key management. As a cross-chain bridge involves the interaction of assets & data on two different public chains, its complex design has created a loophole in terms of contract permission, making it the target of hacking.

In light of such vulnerabilities, we can tell that the root cause of attacks that target cross-chain bridges is their sheer reliance on multisignature (among centralized members) or validators to protect asset transfers. Although this approach makes it somewhat faster to transfer assets between blockchains, it also creates serious security concerns.

Cross-chain swapping at the communication layer

Cross-chain solutions like LayerZero and Axelar support universal messaging, allowing all types of data and information (including arrests) to move across multiple ecosystems, and applications can even make arbitrary function calls across chains, enabling them to enter other communities without having to get deployed elsewhere. Other protocols such as Synpase and CELER are limited to the cross-chain swapping of assets or tokens.

On-chain messaging remains a key component of blockchain infrastructure. As DApp development and retail demand grow, a protocol’s ability to interact with its users in a meaningful, decentralized way will be a key growth driver.

When it comes to cross-chain bridging and messaging, almost all methods fall into the following two categories: 1) those that reach a consensus and form a middle chain that verifies and forwards messages between two chains, and 2) those that run a light node directly on the blockchain.

LayerZero

LayerZero is an Omnichain Interoperability Protocol designed for lightweight messaging across chains. LayerZero provides authentic and guaranteed message delivery with configurable trustlessness. The protocol is implemented as a set of efficient, non-upgradable smart contracts.

LayerZero solves two problems of existing cross-chain solutions: 1) Though the way a middle chain receives, verifies, and forwards messages between blockchains is less expensive, it is not secure enough, and 2) On-chain light nodes receive and verify all block headers for each paired chain, which is secure but expensive. In this respect, LayerZero has introduced Ultra Light Nodes (ULNs) that combine the security of light nodes with the cost-effectiveness of middle chains. This is achieved by performing the same validation as an on-chain light node; but instead of keeping all block headers sequentially, block headers are received on-demand by decentralized oracles.

Two roles: Oracle and Relayer

When a User Application (UA) sends a message from Chain A to Chain B, the message is routed through the endpoint on Chain A. The endpoint then notifies the UA-specified Oracle and Relayer of the message, as well as its destination chain. The Oracle forwards the block header to the endpoint on Chain B, and the Relayer then submits the transaction proof. The proof is validated on the destination chain and the message is forwarded to the destination address.

In terms of security, if you use Chainlink as your oracle, any malicious action in the system is still predicated on first being able to defeat the Chainlink DON (which is no easy task). Even if the Oracle A’s consensus is corrupted and the Relayer A is colluding, all User Applications using Relayer B-Z or Oracle B-Z remain completely unaffected.

With regards to users, LayerZero also enables unified liquidity across all chains with guaranteed finality on the source chain. This means users own real assets on Chain B, instead of merely a certificate like a piece of paper.

Application

Stargate is the first fully composable liquidity transfer protocol on LayerZero. In just a few weeks after it went live, the project’s TVL has hit USD 3,735,601,761.71 as of March 31. Stargate now supports Ethereum, BSC, Avalanche, Polygon, Arbitrum, Optimistic, and Fantom. Recently, the project team has also disclosed that Stargate will support the Cosmos-IBC protocol.

Future

SushiSwap has also approved its integration with Stargate through a voting process. Perhaps, SushiSwap will become the largest DEX for cross-chain transactions. By then, you would no longer need 11 separate bridges to swap assets from 11 chains to Ethereum.

Axelar

As LayerZero and Startage start going after Cosmos-IBC, there is not much time left for Axelar, a cross-chain interoperability protocol that also serves Cosmos.

Axelar is composed of a decentralized network of validators, secure gateway contracts, uniform translation, routing architecture, and a suite of software development kits (SDKs) and application programming interfaces (APIs) to enable composability between blockchains.

Three key components: decentralized network, gateway smart contracts, and developer tools

A decentralized network is supported by a set of validators that are responsible for maintaining the network and executing transactions. Validators run the cross-chain gateway protocol and engage in multi-party cryptography (MPC) concerning the voting and validation of on-chain transactions.

Gateway  smart contracts provide the connectivity between the Axelar network and its interconnected Layer 1 blockchains (e.g. Ethereum). After validators read incoming transactions and reach a consensus, they write to the destination chain’s gateway to execute the cross-chain transaction.

Developer tools: Sitting on top of the validators and gateways are the APIs and SDKs (the libraries and tools that enable developers to access the Axelar network easily).

In terms of security, the consensus validation provided by Axelar, a Layer 1 blockchain, is more secure than third-party validators and other protocols that come with built-in validators. This approach also enables strong scalability, and the development components allow DApps to move from other chains to Chain B within a shorter period. For developers, building DApps on Axelar to make them compatible (from bottom-up) with other chains might be the best solution.

Application

Axelar has launched a decentralized cross-chain asset transfer application called Satellite.

Satellite will facilitate the transfer of native Terra assets like LUNA and UST between many EVM and non-EVM chains, including Terra, Avalanche, Polygon, Ethereum, and Fantom, with Moonbeam following soon after.

In conclusion, LayerZero and Axelar have changed the traditional solutions proposed by cross-chain bridges and interoperability protocols, adopted a lighter approach for messaging and validation, and made their own trade-offs and improvements in terms of security and speed. However, such advantages do not fully ensure the cross-chain security of assets. Developers should wait and observe the market adoption and ecosystem growth of the two protocols. That said, both protocols meet the real needs of developers to a certain extent, while users are more concerned about the security of their assets and the efficiency and cost of asset transfers. In any case, LayerZero and Axelar might start a new chapter for the cross-chain sector.


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