Cross-chain and interoperability technology have recently become buzzwords, with many projects launching and claiming that their solution will revolutionize the way dApps are built and how users navigate across the different blockchains. While cross-chain and interoperability have the potential to bring with it benefits for both users and developers, it is also important to consider the potential points of failure and potential downsides.
Countering the “Benefits”
Almost all the cross-chain projects out there have been peddling the “benefits” of going cross-chain by utilizing their platform that it can some times feels like listening to a snake oil salesman making their pitch. But is going cross-chain all its cut out to be?
- Bridging tokens to any blockchain
The first use case for bridges is to allow users to bridge their tokens to the various available blockchains. It is in the interest of the cross-chain protocol or bridge to provide as many options to users as available. After all the increased usage provides returns in fees collected.
This movement of users across the different blockchains now increases the appeal of alternate layer-1’s as adoption and usage inceases. It however causes various knock on effects which negatively impact both users and protocols deploying multi-chain.
- Capitalizing on the adoption of alternative chains
Now that alternate blockchains have gained adoption, projects are encouraged to move beyond their native chain to quickly capture both market share and visibility and create a moat around their business areas.
But deploying to the different chains raises the need to also deploy tokens and liquidity across more chains. This can spread the projects resources thin simply because more chain deployments causes liquidity fragmentation and thinning the available liquidity on chains with smaller adoption rates.
- Fragmentation of liquidity
Now with the liquidity of multi-chain projects fragmented, cross-chain protocols begin to offer services to address the limitation and allow projects to maintain combined liquidity while still serving the dApps deployed across the different chains.
This encourages a reliance on cross-chain protocols in order for projects to continue to effectively manage their liquidity spread. But for every new chain a cross-chain connects to the inherent risks increases.
- Increased Risks
The ability to bridge to new chains and ape into protocols with large incentives is of course enticing. However this comes with security trade-offs, where exploits of the bridge or the connected blockchain itself can lead to a loss of funds or at best the devaluation of tokens held on the blockchain exploited.
The nomad bridge exploit saw liquidity providers on the bridge quite literally lose almost all their funds. The Harmony bridge exploit while not associated with other bridges has however still led to a devaluation of liquidity on Harmony at the time of the exploit as the tokens were no longer backed 100%. These two examples have till today not been completely addressed which now leaves the impacted users to either wait in hope or take the hit and move on.
- Bridge specific tokens and their liquidity
With exploits causing insecurity both amongst users and projects, cross-chain protocols had to address these concerns and one method was to issue bridge specific tokens. These are tokens demarked by the bridge the funds enter a chain with.
This addresses situations in the event a bridge is exploited, only funds on that specific bridge is impacted. The solution worked as desired as seen during the exploit of the nomad bridge. Funds on EVMOS not bridged using the nomad bridge was for greater part unaffected as they remain backed by the tokens locked on the specific bridge.
However, bridge tokens often have very limited liquidity for swaps since the liquidity pools maintained on DEXs need to be constantly checked and replenished. If there is insufficient liquidity on the DEXs of smaller blockchains, users may need to bridge back and suffer losses due to gas fees incurred for the transactions. This is why businesses such as Circle are introducing native stablecoin swaps for the $USDC token across all the available blockchains.
The various scenarios seem to create a “catch-22” situation, where the implementation of cross-chain protocols is necessary to meet short-term needs, but may cause other problems down the line. Is it worth having so many blockchains and requiring users to switch between them? Do cross-chain protocols have an obligation to evaluate the chains they link and put in place necessary safeguards?
In conclusion, it is essential to think critically about the risks and difficulties that come with cross-chain and interoperability technology before using it. Careful examination of security concerns, compatibility problems, and scalability obstacles must be done to guarantee that this technology is utilized safely and securely. The experience is less than ideal now but is the space critical enough to warrant further research and development time? Only time will tell.