The public blockchain sector has grown from less than a few million dollars in the last decade to a $1 trillion industry. However, one thing that has not been solved is a decentralized and secure interoperable solution.
Let’s take Ethereum (ETH) to Bitcoin (BTC), the largest blockchain network for example. Until now, a centralized exchange was the only solution that could be used to switch from one chain to another.
A centralized solution provider, BitGo, provides the largest liquidity for Ethereum users to gain exposure to BTC through Wrapped Bitcoin (WBTC). BitGo IOU accounts for more than 93.6% of Bitcoin connected to Ethereum. Users should rely on BitGo partner platforms like centralized exchanges or CoinList to exchange BTC and WBTC.
The dominance of WBTC presents a clear risk of centralization and regulation. RenBTC, a platform managed by Alameda Research, was liquidated in December after the collapse of FTX, and the same may happen with BitGo. Recent regulatory violations at Paxos for issuing a USD-backed token, BUSD, may finally bring services like BitGo into the crosshairs of the US SEC.
Interoperability between smart contract platforms and other application-specific blockchains should also be developed. Sidechains and rollups on Polygon (MATIC), Arbitrum and Optimism comprise 90% of the cross-chain bridge volume of Ethereum. Near’s (NEAR) Rainbow and Fantom (FTM) bridges are the only independent blockchains with total value locked (TVL) in bridges with Ethereum.
Some major crypto 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 creating a working “network of networks”. However, Cosmos has not attracted enough liquidity for the ecosystem, and Polkadot continues to grow.
The problem of centralization of the bridge
The 2021 hype cycle witnessed the emergence of a “multichain future” where the various functions of the host blockchain are similar but integrated through interoperable solutions. The first generation of bridges was very primitive and centralized, eventually becoming a hot target for exploitation.
Next-generation interoperable solutions operate as separate blockchains to include decentralization and improve security. This includes intermediary transfer tokens like RUNE Thorchain. However, the daily transfer volume is over Thorchain has remained below $20 million, suggesting that it has failed to pick up usage.
Thresholdwhich introduces a trustless and private portal for Bitcoin on Ethereum, will be launched in Q1 2023. It will look to replace centralized providers like BitGo to speed up liquidity between Bitcoin and Ethereum.
Several other protocols focus on interoperability between smart contract platforms.
LayerZero is an omnichain interoperability protocol that allows the development of DEX-like applications and credit protocols on top. The protocol can interact with monolithic chains like Ethereum, Cosmos Hub, and Solana. Stargate is the first DEX built using LayerZero and has $324 million in liquidity across Ethereum, Polygon, BSC and Avalanche.
Celestia is a layer-1 blockchain built using the Cosmos SDK. The platform supports the execution of smart contracts but is only responsible for carrying out transactions and making blockchain data more accessible.
It aims to act as an intermediate layer between the Ethereum roll-up and the mainnet by compressing the roll-up data for faster execution on Ethereum layer-1. Celestia does not verify block data but helps optimize gas costs and execution speed. This capability will extend to layer-1 blockchains like Cosmos, Solana and Avalanche.
The team will hold an incentive test in Q1 2023 to start public testing and reward testnet validators with a potential airdrop of the original token.
Related: ‘Multichain future is very clear’ – MetaMask to support all tokens through Snaps
Fuel Labs, the Fuel Network team, also developed the Fuel Virtual Machine (FuelVM) and the Sway programming language, which increases the speed of transactions. The team launched a second beta testnet in November 2022, and the public testnet is expected to go live in 2023.
While the interoperable space remains underdeveloped and exposed to the risk of centralization, various teams are working on a decentralized solution that will be launched in 2023. The protocol will speed up liquidity securely in DeFi protocols and other layer-1 blockchains. In addition, they will also help build a multichain future, where the user experience will be blockchain agnostic and interact seamlessly.
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