The public sector of blockchain has grown from a few million dollars in the last decade to a trillion dollar industry. However, something the space has yet to figure out is a decentralized and secure interoperable solution.
Take Ethereum (ETH) and Bitcoin (BTC), the largest blockchain network, as an example. Until today, centralized exchanges are the only viable solution to move from one chain to another.
A centralized solution provider, BitGo, provides the largest liquidity pool for Ethereum users to gain exposure to BTC through Wrapped Bitcoin (WBTC). The BitGo IOU represents more than 93.6% of the Bitcoin bridged to Ethereum. Users must trust BitGo partner platforms, such as centralized exchanges or CoinList, to trade BTC and WBTC.
WBTC’s dominance exposes it to obvious centralization and regulation risks. RenBTC, a platform run by Alameda Research, was dissolved in December following the FTX crash, and the same could happen with BitGo. The recent regulatory crackdown on Paxos for issuing a dollar-backed token, BUSD, could also end up putting services like BitGo in the crosshairs of the US SEC.
Interoperability between smart contract platforms and other application-specific blockchains should also be developed. Polygon (MATIC), Arbitrum and Optimism sidechains and rollups comprise 90% of Ethereum interchain bridge volume. Near (NEAR)’s Rainbow and Fantom (FTM) Bridges are the only independent blockchains with a remarkable total value locked (TVL) across bridges with Ethereum.
Several major cryptocurrency projects, such as Polkadot (DOT) and Cosmos (ATOM), implemented modularity from the ground up to build a secure and scalable cross-chain platform, with the ultimate goal of establishing an interoperable “web of networks.” , Cosmos has not yet attracted enough liquidity to its ecosystem, and Polkadot is still in development.
The bridge centralization problem
The 2021 hype cycle witnessed the emergence of a “multi-chain future” in which various blockchains host specific functions like but are tied together through interoperable solutions. The first generation of bridges were very primitive and centralized, which ended up making them easy targets to exploit.
The next generation of interoperable solutions work as separate blockchains to include decentralization and improve security. These include intermediate transfer tokens like Thorchain’s RUNE. However, the daily volume of transfers through Thorchain it has remained below USD 20 million, which suggests that its use has not been able to pick up.
Thresholdwhich introduces a private and trusted portal for Bitcoin on Ethereum, is set to launch in Q1 2023. It aims to replace centralized providers like BitGo in providing liquidity between Bitcoin and Ethereum.
Other protocols focus on interoperability between smart contract platforms.
LayerZero It is an omnichain interoperability protocol that allows the development of applications such as DEX and lending protocols on top of it. These protocols can interface with monolithic chains like Ethereum, Cosmos Hub, and Solana. Stargate is the first DEX built using LayerZero and has liquidity of $324 million across Ethereum, Polygon, BSC, and Avalanche.
Celestia it is a layer 1 blockchain built with the Cosmos SDK. The platform supports the execution of smart contracts, but is only responsible for ordering transactions and making data on a blockchain more accessible.
Its goal is to act as an intermediary layer between Ethereum roll-ups and the mainnet, compressing roll-up data for faster execution on Ethereum layer 1. Celestia does not verify the data of the blocks, but it helps to optimize the cost of gas and the speed of execution. This capability will be extended to layer-1 blockchains such as Cosmos, Solana, and Avalanche.
The team will run an incentivized test in Q1 2023 to kick off public testing and reward testnet validators with a potential native token release.
Fuel Labs, the team building the Fuel Network, has also developed the Fuel Virtual Machine (FuelVM) and the Sway programming language, which improves transaction speed. The team launched its second beta testnet in November 2022, with the public testnet expected to go live sometime in 2023.
Although the interoperable space remains underdeveloped and exposed to centralization risks, several teams are working on decentralized solutions that will launch in 2023. These protocols will serve as a secure bridge for liquidity between DeFi protocols and other Layer 1 blockchains. they will also serve for the interoperability of DeFi protocols and other layer 1 blockchains. In addition, they will also help build a multi-chain future, in which the user experience will be independent of the blockchain and interact with each other seamlessly.
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