Opinion: Why is interoperability important for DeFi?

Author: Haotian | CryptoInsight; Source: Author's Twitter @tmel0211

When DeFi is labeled as a "container" After being labeled as "Baby", Ethereum has actually entered its later years of "consensus overload".

At this moment, to fight against the impact of new performance chains such as Solana, Ethereum actually has another way besides protecting the legitimacy of DA and constantly expanding the Rollup layer2 camp. Walkable: Release liquidity to the entire chain through interoperability.

Yes, instead of letting the bubble get too big and trap itself, it is better to divert some of the overloaded liquidity and let these Old DeFi brands extend their tentacles into the multi-chain environment down, thus forming a new “competition barrier”.

Entangle, which I want to share today, is committed to solving the liquidity problem of the entire DeFi chain. At first glance, it sounds similar to LayerZero and Cosmos. So, what is the difference between these interoperability solutions? How does Entanglefi specifically overcome DeFi cross-chain and cross-chain issues under complex Oracle challenges? Next, I will try to analyze from a business narrative perspective, why is interopeablity important to DeFi?

Cosmos solves the interoperability problem between heterogeneous chains through SDK and IBC protocols, and is an infra that builds multi-chain interoperability. LayerZero uses cross-chain and Tools and protocols such as oracles provide a universal and scalable cross-chain interoperability framework.

Entangle focuses on DeFi ecological projects and provides solutions to promote the liquidity interoperability of cross-chain DeFi protocols: Liquid Vaults and Oracle, thereby improving the efficiency of capital circulation. , improve user experience.

Simply put, the interoperablity capabilities provided by cosmos and layerZero are more focused on the underlying infra, building a framework, while Entangle focuses on the DeFi application layer and anchors It provides special interoperable capabilities based on "capital circulation efficiency, transaction friction, and Oracle price feed rationality" that determine DeFi preferences.

However, it is not easy to achieve full-chain liquidity integration, management, and combined applications of DeFi protocols. How to do it?

1) Liquid Vaults, Entangle provides a middle-layer cross-chain asset library; users pledge liquidity in A-chain such as Uniswap, and the LP certificate obtained can When deposited into Liquid Vaults, the Entangle contract will generate a receipt (LSD). The original LP can still enjoy income in Uniswap, and this receipt can be used as new liquidity to directly cross-chain and be combined into other DeFi liquidity to expand income. Currently, there is at least 14B of DEX liquidity scale that can be used for liquidity extension and expansion applications.

Based on user orientation, the more chains that the interoperablity layer can integrate and connect to, the richer the asset circulation scenarios that can be realized, especially the ability to combine EVM and Non -EVM's heterogeneous chains are also connected, which will reduce the steps and complexity required for users' cross-chain operations and reduce transaction friction. This is a rigid need, such as cross-wallets, cross-chain bridges, etc.;

The "cross-chain bridge" service provided by the interoperable layer is different from other protocols that specialize in cross-chain services. The goal of interoperablity's cross-chain is to allow the funds of chain A to be used at the lowest cost. Friction creates circulation in B chain, focusing on the circulation and use of assets in DeFi. Unlike traditional cross-chain bridges, the handling fee itself is a kind of transaction friction.

In short, Liquid Vaults serves as an intermediary layer to build new tradable certificates (LSDs) for the liquidity in known DEXs, eliminating the complexity of the user side. The cross-chain operation of assets reduces transaction friction, expands the value coverage of existing liquidity, and expands the possibility of income.

This involves smart contract communication issues between heterogeneous chains, heterogeneous chain asset bridging issues, unified specification issues for different native link interfaces, etc., which particularly tests integration. chain communication, asset management, and dispatching capabilities.

2) Oracle Oracle, after completing the cross-chain aggregation Vault service of heterogeneous chain assets, another challenge is how to achieve state interoperablity coordination between DeFi protocols. For example, a user pledges assets on the A-chain Lending platform to obtain an LP certificate, and then uses the recepit to the B-chain through Entangle, and the B-chain again pledges the certificate for lending. In an extreme case, if asset prices fluctuate significantly and Oracle fails to coordinate the status of bilateral assets, bad debts may easily occur. For example, a user redeems assets in chain A before the assets in chain B are liquidated.

The key to dealing with this thorny problem is the Oracle price feeding mechanism. Oracle needs to be able to integrate on-chain + off-chain price data in real time and be based on TWAP and VWAP Carry out effective time- and transaction volume-weighted price feeds to predict possible asset status transitions on chains A and B, and then make correct asset processing decisions to avoid bad debts due to oracle price feeds and communication problems.

Based on liquid Vaults to solve asset cross-chain friction, and based on Oracle to solve asset chain status management, it can coordinate these two pieces, and one set is specially designed for DeFi circulation scenarios. The interoperablity solution can be applied.

Why can Ethereum alleviate the DeFi consensus overload problem? The logic is also very simple:

1) DeFi operations within a single chain have matryoshka limitations: engaging in DeFi matryoshka and restaking superposition within a chain are actually limitations Liquidity is used to increase expectations of future value-added assets. Although it can create new profit opportunities, it also limits the liquidity of assets. Assets are locked during these operations and therefore cannot be used for other potential investment opportunities.

2) Cross-chain liquidity expansion, cross-chain interoperability allows an asset that has been applied in chain A to flow to other chains to combine other chains Finding value through liquidity can not only bring capital and activity to the new chain, but also reduce pressure on the original chain;

3) DeFi After the agreement operates stably, the amount of funds, number of users, profitability, etc. will become an intangible brand and reputational asset. Indirectly extending the brand to other chains through interoperability is actually a kind of brand gain. It avoids the concerns that many old brands are reluctant to expand into new chains, and also avoids the various risk costs of new expansion that exist when restarting the stove.

Everyone can also feel that the fields of Data Availability and Interoperability have long been at war. In the former, Ethereum wants to guard the boundary, but it is inevitably subject to modularization. The invasion of thoughts, the latter is an opportunity with no harm at all.

Even if Ethereum unfortunately becomes a "DeFi module bottom layer" among many chains in the future, no one can shake Ethereum's status.

Note: Interoperability is indeed a direction worthy of attention. Chainlink is considered the originator, and LayerZero is hard to describe. In addition, Wormhole and ZetaChain are both worthy of attention, and we will take the time to analyze them in detail.