Layer 2 solutions have grown in popularity over the past year due to Ethereum’s network congestion and skyrocketing transaction fees. As of now, the Layer 2 expansion plan has become one of the roadmaps with the highest consensus in the current Ethereum community and even the entire blockchain circle. "Layer2" or "L2" has spawned many solutions (rollups, validium, plasma, state channels, etc.). These solutions help DApps scale by taking transactions off-chain, but whether they can trigger a massive boom in on-chain transactions requires more refinement.
However, with the vigorous development of heterogeneous chain ecosystems such as Cosmos, BSC, Avalanche, and Solana in the past year, a large number of cross-chain solutions have appeared on the market. Ethereum users in the market want to look at other ecosystems, and other Layer 1 project teams want to attract liquidity from the Ethereum ecosystem as a starting point. This article will focus on the following cross-chain solution projects: Celer Network, Hop Protocol, and Connext Network.
Celer Network: a mature cross-chain protocol
Celer positions itself as a multi-chain operating system rather than a simple cross-chain protocol. Celer uses its own State Guardian Network (SGN) to ensure cross-chain interoperability and security. We can clearly see the advantages of cBridge in the entire field of cross-chain bridges. With cross-chain bridges becoming cash machines for hackers, cBridge is currently one of the few cross-chain solutions that has not yet seen a large-scale security breach. Since the launch of the cBridge 2.0 mainnet, we have observed that more than 25 links have entered cBridge, and the TVL has reached 724.58 million US dollars. With the recent token airdrops of Layer 2 protocols such as Optimism, we expect cBridge's TVL data to continue to grow further.
cBridge's TVL data continues to grow, source: DeFi Llama
The essence of cross-chain technology is the safe and reliable transmission of information between different blockchains. Therefore, making transactions and other on-chain behaviors on cross-chain bridges preventable and controllable becomes critical. The SGN-as-a-gateway architecture monitors the entire process of cross-chain transactions. Therefore, the node selection of SGN is very important for such a PoS consensus security system, and the stable operation of SGN is inseparable from the pledge and verification of CELR token holders. The CELR staking process is a key part of the economic security of Celer's cross-chain messaging framework. To use SGN's message routing services and store multi-signature proofs, users must pay SGN for these services. These fees will be distributed to CELR stakers and validators to incentivize their work in securing the network as well as block rewards. Further growth in CELR staking addresses the growth of the Celer multi-chain network.
This year, the number of CELR staking addresses has further increased, source: Nansen
Liquidity is the basis of all cross-chain benefits
Liquidity is the foundation upon which all cross-chain benefits are built. cBridge's architecture allows for both co-managed and self-managed liquidity models for liquidity management. SGN has designed a contract mechanism to manage shared liquidity pools on multiple chains to accommodate the preferences of different types of liquidity providers and cBridge node operators. This approach treats the SGN and the liquidity pool it manages as a single "node" along with all other non-custodial LP-managed nodes, and gives LPs the option to quickly delegate liquidity without running a node. This approach greatly aggregates liquidity sources.
Native multi-chain DApps are more competitive in the Layer 2 era, source: blog.celer.network
Inter-chain Beta revenue is currently the main motivation for users to cross-chain. This part of beta income mainly comes from the airdrop rewards of different public chain ecologies and the income farming of on-chain finance. Therefore, the Layer 1 public chain is more closed as a relatively complete ecosystem, while Layer 2 users obviously have a stronger demand for cross-chain income. Celer obviously not only satisfied this part of beta income after solving the cross-chain bridge problem. The message cross-chain framework (Celer IM) recently launched by Celer officially integrates the Alpha revenue opportunities of the multi-chain ecology in the Layer 2 era. Celer IM is a plug-and-play tool and infrastructure for developers. Developers only need a simple contract plug-in to convert the original DApp into a native cross-chain DApp.
Hop Protocol: Cross-chain Lightning Network
Hop Protocol was built by a team of smart contract wallets called Authereum, founded by Chris Whinfrey, co-founder of Authereum and developer of the Ethereum programming language Solidity. Hop Protocol's cross-chain solution is different from traditional state channels, and its cross-chain channel principle is more similar to Bitcoin's Lightning Network.
The specific path is as follows: fast and high-frequency trading channels can be established between different trading parties, a large number of transactions can be off-chain, and the security of off-chain transactions can be improved through facilities such as watchtowers. At the same time, Hop Protocol introduces a new role (Bonder) and a new DeFi components (AMM) to build more complex solutions.
When using Hop's solution, assets need to be transferred to the Layer 2 network through Hop's bridge. For example, ETH entering Layer 2 through Hop's asset bridge is called Hop ETH (or hETH). hETH and ETH are the same and can be exchanged through Hop. However, there is also an "official" version of ETH in the Layer 2 network, which is the version of ETH that is commonly used by more people. In theory, the official version of ETH and hETH should be completely equivalent, but due to liquidity reasons, there may be some spreads.
hETH schematic diagram, source: app.hop.exchange
Hop Protocol then introduced the AMM and "Bonder" components. AMM aims to solve the short-term fluctuations in the price difference between the official version of ETH and hETH. The role of "Bonder" can be to provide liquidity for users who need to release liquidity in advance, and can also obtain part of the income.
It is here that Hop uses Curve's StableSwap AMM solution to connect the liquidity of two nearly homogeneous assets, which can offer lower slippage. Bonder can promote the official version of ETH for the network by observing the transaction data between different Layer 2 networks. Arbitrageurs between different Layer 2 networks will continue to rebalance to keep the price of AMM within a reasonable range.
A single purpose-built asset bridge solution is not competitive
Since Hop Protocol mainly focuses on the general asset bridging direction, there is currently no obvious opponent on the general asset bridging track. We can compare this to a dedicated asset bridge DAI. As one of the oldest DeFi applications in the Ethereum ecosystem, Maker, the issuer of the USD stablecoin DAI, originally designed a dedicated DAI asset fast transfer channel for the Optimism network. Users can quickly transfer DAI on Layer 1 to Optimism through Maker's solution. In the network, DAI in the Optimism network can also be quickly withdrawn to the Layer 1 network.
Hop’s TVL mainly focuses on the Ethereum ecosystem, source: DeFi Llama
However, as the types of underlying assets in the Ethereum ecosystem continue to expand, it is clear that more asset channels are needed in the ecosystem. And Hop's Universal Asset Bridge launched an instant transfer function. As the number of assets and Layer 2 networks it supports grows, users are more willing to transfer tokens between networks. Hop issues its own "hToken". hTokens can be transferred quickly and cheaply between Layer 2 networks and are destroyed upon redemption. Hop also launched StableSwap automated market makers on each supported network to facilitate trading between hTokens and their underlying assets. From this point of view, it is clear that Hop's general-purpose asset bridge solution has more market value than a single dedicated asset bridge.
Connext: Fast Transactions for Web3.0
Connext originally developed a Layer 2 scaling solution based on state channel technology. However, under the premise that the current Ethereum community pays more attention to expansion solutions such as Rollup, they changed their thinking in due course. Instead of competing with these Rollups, they provide a network of fast transactions across Layer 2. According to the Connext team, the Vector routing network technology they developed can link various Layer 2, Ethereum 2.0 shards and other public chain networks. This also shows that their technique can be extended to larger scenarios. However, under the premise of the current ecological development, the community obviously needs to meet the fast transactions between Layer 2 networks.
Since they are both state channel technologies, their implementation can be compared to Bitcoin's Lightning Network. To deploy Connext's smart contracts in different Layer2 networks, users only need to submit assets to the Connext network through the contract, and then they can conduct high-frequency off-chain transfers with some operators, constantly update the latest status, and finally realize billing in the Layer2 network . The Connext team stated that the scheme can also support non-EVM (Ethereum Virtual Machine) compatible chains, but Turing completeness is required.
Image showing Connext: Transfer from Ethereum to Fantom, source: bridge.connext.network
From the data point of view, Connext's TVL data is not as clear as Celer and Hop. The main reason is that most of the DeFi products built for Layer2 cross-chain ecology are under testing. And because there are few supported DeFi assets, it is relatively weak in the competition. But judging from its product roadmap, the grant model has obvious latecomer advantages. If the team can continue to polish the product, the solutions based on cross-chain design in the Web3.0 era will have a cluster effect.
Who will lead the acceleration of cross-chain interaction growth?
The above-mentioned projects are conceptually based on the expansion route of the Ethereum ecology, but what they are doing is "going out". Despite Ethereum network congestion, Layer2 solutions allow users of any Ethereum application to enjoy instant and affordable transactions at extremely low gas costs, while still enjoying the robust security and decentralization of Ethereum mainnet performance.
Therefore, we believe that in the competition of Layer2 solutions, there will be a climax in the mutual deconstruction of the public chain ecology. Since the current types of cross-chain assets are still very thin and lack imagination, various public chains and Layer 2 solutions mainly rely on the cross-chain benefits of mainstream assets. This is not to say that the cross-chain gameplay of DeFi is unsustainable, but because this kind of interactive gameplay itself is difficult to create long-term demand, and will eventually return to the web3.0 product itself.
We all know that cross-chain cannot create more Web3.0 production materials, so the multi-chain ecology is more attractive. Looking at the next stage of cross-chain with a unified global thinking, it is not difficult to find that projects like Celer, which rely on their own technical ingenuity and ecological thinking, are more likely to guide liquidity to the reality of Web 3.0 landing scenarios. Of course, judging from the current data, everyone's starting point is similar.
Looking back at these three projects, each project is facing many unknown problems, including the lack of innovation in Layer 2 DeFi products, whether the protocol needs governance tokens, and the relatively centralized mechanism, which still needs time for the team to improve. In addition, regarding the resolution of cross-chain technical difficulties and the optimization of user experience, this is also a problem that projects in the cross-chain field must face. For these, we firmly believe that the growth opportunities and scalability of "Chain x Chain" over time will be due to modularity and interoperability. These projects will present diversified income colors, and we will also see a more fragmented multi-chain pattern.
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