Multi-Chain Liquidity Protocol
Multi-Chain Liquidity Protocol
VeradiVerdict - Issue #199
Over the past year, the total value locked on alternative layer 1 blockchains such as Solana, Avalanche, Fantom, Binance Smart Chain, etc. has increased significantly. Ethereum remains the center of innovation in DeFi, but the need for faster and cheaper transaction costs has spurred the transfer of liquidity to similar protocols on other blockchains. For example, NFT launches and undercollateralized lending have been major sources of market activity in the past year, and their growth in alternative L1s has been indicative of this phenomenon.
However, for TVL to accrue to these alternative blockchains, there must be a way to transfer assets to them. The most common approach to doing so is to utilize a cross-chain token bridge, where users lock up their tokens on a source blockchain (most commonly Ethereum) and a third party mints a wrapped version of the token on the target blockchain, and vice versa. This guarantees that, assuming no minting of the token on the original blockchain, the supply of the token remains constant across all blockchains.
The main problem with a cross-chain token bridge is that its bare-bones usability can be lacking. Swim Protocol is a protocol built on top of one of the most infamous bridges, Wormhole, that allows users to more seamlessly transfer assets across multiple blockchains.
Source: Swim Protocol Medium
Cross-chain token bridges and their woes
As mentioned above, the paradigm for implementing cross-chain token bridges involves a trusted third party (i.e. relayer) that watches for changes two or more blockchains, where this third party controls the contract that mints wrapped tokens. To better illustrate this, consider moving assets between Ethereum and Solana. If a user wants to move ETH from Ethereum to Solana, they would first lock the ETH in a smart contract on Ethereum which relayers monitor, and upon receiving a deposit relayers would issue a transaction on Solana to mint a version of wETH (wrapped ETH). If a user wants to move wETH from Solana to Ethereum, they would call a function to burn wETH in its contract on Solana, from which the relayers will watch the transaction and release ETH from the Ethereum contract to the desired address. One of the major issues that arise is that there can be many cross-chain bridge protocols, which can give rise to many different versions of wrapped assets on each blockchain. Furthermore, some tokens have canonical versions on many different blockchains, which further adds to this confusion. For example, USDC exists on both Ethereum on Solana, but when bridging USDC to Solana via Wormhole, the user receives wUSDC on Solana as opposed to the canonical USDC. Most users, therefore, resort to swapping these wrapped tokens through decentralized exchanges to obtain the canonical version for interoperability with existing protocols on the target blockchain, which adds another layer of complexity, and even capital efficiency, to the user experience of cross-chain token bridges. Furthermore, another glaring problem is that the relayers are often not decentralized, which creates a potential vector for censorship risk. In particular, users may no longer be able to transfer assets back to their source blockchain if the bridge is compromised.
What is Swim Protocol?
Swim Protocol builds on top of an existing cross-chain token bridge, Wormhole, to make the experience of bridging more seamless for stable assets (USDC, USDT, and BUSD) between Ethereum, Solana, and Binance Chain. It incorporates a StableSwap AMM (the underlying architecture of Curve.fi’s AMM, to ensure minimal slippage between USD-pegged assets) and directly swaps the wrapped tokens through it to obtain their canonical versions so the user does not have to do this manually.
Users can also provide liquidity to the AMM by depositing any amount of any asset on any blockchain. Furthermore, the user can opt to receive LP tokens on any blockchain they prefer. However, the AMM itself is deployed on the Solana blockchain to ensure low protocol-level transaction costs, so all supplied assets are first bridged to Solana through Wormhole. Like cross-chain transfers, cross-chain liquidity is also highly seamless, as can be seen below:
Swim Protocol’s interface for providing cross-chain liquidity. Source: Swim Protocol Stablecoin Hexa-Pool
What about the decentralization of relayers? Wormhole is not a decentralized coalition of relayers but rather a centralized federation of trusted parties, but it is run by those whose incentives are aligned with maintaining the infrastructure of its peripheral blockchains and is the most used bridge between Solana blockchains, which justifies its use in Swim Protocol.
Who is behind Swim Protocol?
Troy Tsui (CEO): Quantitative Trader at Alameda Research and SIG
Arv (CTO): Software Engineer at FTX and Alameda Research
Teddy Pornprinya (Head of BD): Associate Coinbase Ventures and Analyst at DC Advisory
Closing Thoughts
Pantera recently led a $4m round into Swim. Swim Protocol provides a highly capital-efficient and seamless experience for performing cross-chain asset transfers, particularly for stablecoins. Currently, Swim Protocol is planning to launch more pools that involve other assets and other blockchains such as the BTC Tri-pool (Solana BTC, Ethereum WTBC, and Binance Chain BTCB), and USD-pegged pools on other alternative blockchains such as Avalanche and Polygon.
Though the decentralization of relayers remains an issue for Wormhole, Swim Protocol could easily switch to a different, more decentralized bridge. Furthermore, Swim Protocol can also easily add functionality to swap any asset across blockchains by adding an interoperability layer with other DEXes like in Symbiosis.
Even though there is a large competition for building blockchain interoperability solutions, Swim Protocol offers one of the most elegant interfaces for cross-chain transfers.
- Paul Veradittakit
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ABOUT ME
Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.