Cross-Chain Liquidity Issues and How A Collider Aggregation Proxy Can Solve Them

In the presentation below, Shamil Khalilov, founder and CTO of Hardron Network, evaluates the challenges faced by layer-2 cross-chain bridges and how Hardron aims to solve these issues.

Below you will find more elaboration on key points highlighted during his talk.

What is Hardron Network

Hardron Network is a layer-2 cross-chain bridge built on the Interchain network. Shamil Khalilov is the founder and CTO of the protocol. He has spent the last two years focussing exclusively on building bridges on layer-2 networks in order to address the liquidity issue that many well-known bridging protocols face.

Shamil also played a major role in developing the Neutrino Protocol, an algorithmic price-stable assetization protocol. It enables the creation of stablecoins pegged to real-world assets such as commodities and national currencies.

More in-depth information about Neutrino can be found on their page.

Layer 2 Cross-Chain Bridges

Cross-chain bridges enable the transfer of data and digital assets across different blockchains. Blockchains typically operate in silos and cannot interact with other blockchain ecosystems.

Cross-chain bridges help users access and interact with dApps on different blockchains, thus facilitating a more interoperable Web3 ecosystem. Layer 2 cross-chain bridges are – obviously – bridges built on Layer 2 blockchains.

Layer 2 blockchains are secondary networks built on top of underlying layer-1 protocols. Some examples of layer-2 blockchains include the Lightning Network, which is built on top of Bitcoin; and Polygon or Metis, which are built on top of Ethereum.

These layer-2 networks help to ease congestion on the networks they are built on, thus improving the efficiency and overall scalability of the system.

A more detailed explanation of layer 1s and layer 2s can be found in this article.

In his presentation, Shamil highlights some of the biggest challenges related to cross-chain bridges. He introduces popular examples of cross-chain bridges like Wormhole and Multichain, and explains how these protocols address those issues.

Wormhole’s Recursive Wrapping Problem: Explained

Wormhole is a cross-chain bridge built on Solana. The protocol bridges assets by locking users’ assets in smart contracts and minting new wrapped tokens on the destination chain.

Wrapped tokens are tokens that have their value pegged to other cryptocurrencies that are native to other blockchains.

An example of a wrapped token is Wrapped Bitcoin (WBTC) - an ERC20 token on the Ethereum Blockchain. WBTC brings the ability to trade BTC on other blockchains like Ethereum and Solana. Wrapped tokens are one of the key elements that facilitate interoperability between blockchains.

Shamil discovered that while the Wormhole system has a healthy liquidity of tokens and is considered quite trustless with 19 validators, it faces a critical issue called the “recursive wrapping problem.”

The recursive wrapping problem arises when the target chain cannot distinguish the origin chain of a wrapped token. For example, if a user wraps USDC on Ethereum and Polygon, then wants to send them to Solana using Wormhole, the system would recognize them as two different tokens, naming them as “Ethereum Wrapped USDC” and “Polygon Wrapped USDC” correspondingly.

More details about the inner workings of Wormhole can be found in this video:

Multichain’s Permissioned Wrapped Token Listing: An Alternative

According to Shamil, one huge challenge faced by many cross-chain bridges is that most of the liquidity is locked on the Ethereum network and maintaining liquidity on Ethereum costs a lot in gas fees.

However, Multichain solves this issue for some tokens with permissioned wrapped token listing where users have to fill in a google form to wrap a token. Users can transfer their wrapped tokens across different chains without interacting with Ethereum, thus helping save on gas fees.

More information about how Multichain works can be found in their documentation here.

The Liquidity Problem in Bridges

Other issues Shamil brings to light are the scarcity of liquid-wrapped tokens as well as price discrepancies of the same token on different blockchains. The lack of wrapped token liquidity would result in much higher market volatility.

Lower liquidity levels would also make cross-chain bridges far more susceptible to market manipulations.

In contrast, high liquidity would mean a much more stable market.

Shamil provides the example of the collapse of the Terra stablecoin, UST, where users who had wrapped UST on Wormhole lost all their funds.

Check out this article for more details of what happened.

Hardron Network’s Collider Treasury

According to Shamil, Hardron Network offers solutions to such scenarios with its “collider treasury” where bridging only occurs with liquid assets.

When a token’s value plunges to 0, users would lose only about 50% of their funds.

The Collider also uses a collider aggregation proxy to detect price discrepancies of the same token on different chains.

Suppose there is a price difference of more than 2%. In that case, the Collider helps to align the markets by stabilizing the prices to prevent huge losses to liquidity providers during volatile market conditions.

With so many layer-1 and layer-2 blockchains being created and built upon, the conversation around the need for an interoperable future has never been more important.

While there are still many challenges related to cross-chain bridges, work is being done by Shamil and Hardron Network to improve the interoperability of dApps across the different ecosystems while maintaining a high level of security.

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