The Capital Efficiency of Bridges

Live from Breakpoint 2021, Austin Federa (Solana Labs) moderates a discussion about the transfer layer and cross-chain bridges with Hendrik Hofstadt (Jump Crypto), Bryan Pellegrino (LayerZero), Alex Smirnov (deBridge) and Andriy Velykyy (Allbridge.io).

00:10 - Intro

02:50 - The importance of bridges not relying on Trust

04:28 - Moving wrapped assets

12:00 - Capital Efficiency of Bridges

14:02 -  Future of bridges

16:28 - Integration of bridges

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Austin (00:10):

All right. Welcome guys. We're here to talk today about the transfer layer, scalability, cross chain bridging, the technical problems, the operational problem, the UX problems. This is just a panel of problems today, but it's also a panel on opportunities. We've seen a huge amount bridge over between other protocols in solana between other protocols and other protocols. We think of bridges as something new, but bridges are how DeFi has used Bitcoin as collateral for quite a long time at this point. It's kind of funny to think about how this started as we're taking an asset that's considered quite stable and solid that has no smart contract ability and being able to use that in Ethereum and that early day work really set the stage for, I think, a lot of what we're seeing today.

Austin (00:55):

But bridges go far beyond just this idea of how do I move something from chain A to chain B. There's roles in them as being decentralized ways to pass messages between different chains. There's a role for them in making users feel safe about trading across chains, and there's a role about them, about creating an exit ramp too. So that if you do something like buy an NFT for $69 million, you're not dependent on one chain to hold that. There's an ability migrate in a decentralized and trustless way. So we're getting into a bunch of that today. I'd say, let's just go ahead down the line and give a quick introduce to yourself and your project.

Hendrik (01:31):

Sure. I'm Hendrick. I'm with Jump Crypto and as Jump Crypto we're core contributors to Wormhole, which is a cross chain messaging protocol, connecting high value chains. And message passing in this sense means anything can flow between these high value chains, meaning assets and data. So your coins, NFTs, but also governance decisions and more information like as a base layer for developers to build on top of.

Bryan (01:54):

Bryan from LayerZero. Our focus is purely generic messaging interop. High level is connect every contract on every chain to every contract on every other chain.

Alex (02:05):

Hi everyone. My name is Alex Smirnoff and I'm co-founder of the deBridge Protocol, which is cross chain interoperability and liquidity transfer protocol. So the protocol itself allows to breach any arbitrary assets or data between any blockchains including solana of course, down the road.

Andriy (02:23):

Hi I'm Andriy from Allbridge, I'm a co-founder there. We currently support seven blockchains, and I hope that this number would increase to 12 by the end of the year. We started in July and since July, we bridged to solana one point half billion worth of assets.

Austin (02:44):

It's great to see. So I want to start out with just a level set question and Andriy, we'll start with you. Why is it important for a bridge to not rely on trust?

Andriy (02:54):

You see, when we speak about trusted bridges and trustless bridges, and that is the question, I suppose?

Austin (03:00):

Yes.

Andriy (03:01):

We have to consider that while we all here are building decentralized future, which should be completely trustless, in my personal opinion, sometimes we may sacrifice some layer of some level of decentralization to provide faster and better user experience. Because we are, in the end of the day, we are limited by the technology. And I have been thinking a lot about that because in the very end, we are building for our users and we want to create the product that would be used and used easily. And when we, in some cases, add too much of decentralization, that can affect user experience in a bad way. And this is something that we should consider as the owners of the business. So it is not so simple. I mean, as I said in the very beginning, I'm like a hundred percent over decentralization. I'm just saying, let's not forget about users. They going to use other product in the end of the day.

Austin (04:08):

Sure. So Bryan, when you're looking at something like this, is it possible... We talk about bridges, but these are more than just bridges. It's not like you're just, you take a bridge on a car, you're over the bridge, you're done, if the bridge falls down next week, you're still fine. You've gone over the bridge. But there's a different relationship here when we're moving wrapped assets. Can you talk a little bit about how users manage that and how you're thinking about that?

Bryan (04:33):

Yeah, I mean, I think that is the case when you do use wrapped assets, but I think wrapped assets are... You're always going to need wrapped assets for the primary chains. Because it's not like Ethereum can deploy a contract to mint Eth anywhere. But when you're talking about projects, Aave, Curve, like MIM, all these things, you're getting as projects move more and more to multiple chains, they're starting to deploy their token more and more on multiple chains and you have the ability to actually use native assets. So you can swap a real MIM for a real MIM rather than having four different bridges, which have four different versions of wrapped MIM coming in. And so I do think it's important to realize that over time the expectation should be that we do move away from wrapped assets. I don't think wrapped assets have to be the future for every project.

Bryan (05:14):

We've done it because we have something that's interesting on one chain and we want to create a synthetic on another chain, but these projects are starting to deploy wider and you will see much more of their own native. And especially when you have something, whether it's rebalancing or something like xSUSHI or [inaudible 00:05:32] any of these things. It's very important when you're getting a wrapped asset, you're getting like a Vanilla ERC20 equivalent where there is none of that and it creates a lot of issues. So I do think it's important to realize that move moving forward we will likely see or want to see native assets much more than wrapped assets.

Austin (05:46):

Yep.

Alex (05:48):

[crosstalk 00:05:48] I can adhere that wrapped assets is only kind of a gateway to get into the asset that user wants to get in because eventually cross chain interoperability will be all about the user experience. As a user, I don't want to know what is bridged at all. I just want to open my wallet like Fantom or MetaMask, I want to swap from one asset to another. And I don't care whether it went through wrapped asset or through some liquidity pools. I just want to receive the desired asset in the target chain. So I truly believe that eventually bridges will be kind of TCP/IP. What TCP/IP did for internet. So that's what true cross chain interoperability protocol will do for the internet of blockchain. So it's all about delivering of the user experience and yeah, the only point of interaction between user and DeFi will be the wallet or like decentralized applications, like 1inch or ParaSwap.

Austin (06:42):

Yeah. Yeah. No, I'm going to push you a little bit on that because every step in the wrapping process is a point of either failure or a point of trust. You could have Bitcoin that was originally wrapped onto Ethereum that's moved to Polygon, that's moved to solana, that's moved to Binance Smart Chain, that's moved back to solana. How do you simplify that chain of custody experience for a user? And how much should users actually care about that?

Alex (07:08):

I believe that users do not care about that. I mean the regular user. And as a wrapped asset, for example, what we do at deBridge, we have a wrapped asset in different blockchains, but if you bridge from the secondary chain to the secondary chain, so you basically burn the wrapped asset in one blockchain and you mint it in another. And of course there's kind of a additional risk of the consensus algorithm of the specific blockchain, but that the risk that user takes, because he know that he's going to bridge this asset to this blockchain and in case something will happen, like with the consensus algorithm in this specific blockchain, it's just the kind of collateral in this specific blockchain will be drawn. And that's the risk that user takes.

Bryan (07:49):

Yeah, I think the user doesn't care until something goes horribly wrong. And then the user cares a lot generally, but definitely.

Austin (07:56):

Do you think wrapped assets should trade a discount?

Bryan (07:59):

That's a good question.

Alex (08:00):

Of course not, I think.

Bryan (08:03):

I mean, there's some inherent risk depending on the wrapping mechanism. And I think likely over time, you could see that. I think demand right now, the value of a wrapped Bitcoin is... Well, all right. I don't want to trigger a lot of people, but you can generate yield on a wrapped Bitcoin that you can't generate in an actual Bitcoin. So there's actually maybe the argument that the wrapped asset should trade at a premium rather than a discount, but... [crosstalk 00:08:24].

Austin (08:24):

I love it.

Bryan (08:24):

I'll leave it there.

Austin (08:25):

I love it.

Hendrik (08:26):

I think the core assumption below that is really that notion of trust because that's essentially what the bridge establishes. The bridge establishes trust between chains that can't verify each other, or can't [inaudible 00:08:37] yet like verifying and proof of work chain, verifying different consensus mechanisms, all of these. In order to verify or establish trust between these chains, there's complex mechanisms that differ between any kind of chain. And I think that's what we all essentially bridge in the beginning at the very base layer. We establish trust between these chains and of all bridges I think the most important aspect should be establishing that trust and making sure that the bridge is going to be alive and the bridge is going to be secure.

Hendrik (09:06):

So the notion of [inaudible 00:09:09] and safety as the core properties of the bridges and then applications being built on top, but relying on this core aspect. And the risk that sits at this core protocol then trickles down into the applications built on top of the bridge, eventually wrapped assets. And that's where you could apply risk discount to wrapped assets. But that would hopefully be as small as possible if we all do our jobs right.

Andriy (09:32):

There is one more thing to that, like combining trust to the bridges and what we discussed before about the wrapped assets. So let's say we have an asset coming from Ether to Polygon. So it's being wrapped issued on Polygon. From Polygon we take this asset and rewrap it on solana. Then on solana, this asset, I'm speaking from experience, it's get on Saber our partners converted to the native asset on solana. So for user it is one seamless flow. It is good. It is all under the hood. But for us, it is sometimes scary because ultimately that means that bridges should trust each other. Because a point of failure before the assets come to my bridge can essentially affect my performance as well.

Andriy (10:19):

And it would not be my security problem. It would be problem of other bridge, but I will end up with the wrapped asset that is locked on my bridge, which due to the [inaudible 00:10:30] or something, it costs zero. So what should I do? And this is, again, the question, how can bridge trust each other? What should be the protocol? What can be the thing to unite us and resolve this issue?

Alex (10:42):

But that there is that liquidity providers actually [inaudible 00:10:46]. So it's not about like cooperation between bridges, but more like whether users are able to swap from like wrapped asset to any other asset within these specific ecosystem or like solana or Polygon, whatever. So, yeah, basically when liquidity providers provide liquidity in pair of like wrapped asset pair with a, for example, most liquid asset of these specific blockchain, they trust to bridge and they should kind of believe that bridge is truly the decentralized and trustless.

Alex (11:12):

So users do not bear so much risk, in fact. The risk is mostly on liquidity providers, but the question interoperability is not only about the swaps. First of all, it's all about the delivering of arbitrary messagings or arbitrary call data. Because what I personally would like to see is when protocols on Ethereum could be kind of composable with the protocols on Polygon. So let's say algorithmic stable coin on Ethereum opens up position on the Mango Markets to maintain its [inaudible 00:11:45]. And that would be awesome. And in order to accomplish that, we need to have truly decentralized channels to deliver messages between cross chains.

Austin (11:54):

Yeah. So Hendrik, you guys have been doing a little bit of work on that. I want to ask you two questions. The first is on the capital efficiency of bridges. And the second is on use cases for bridges that are not just assets.

Hendrik (12:04):

Yeah. I mean, right now, if we just look at the wrapped assets, I would say, of course they are in a sense capital efficient, but there could be more. Like there have been people talking about increasing capital efficiency by using the capital on the one side where it's locked into the bridging contract and then also using the wrapped asset on the other side. So essentially double yielding and double earning. I think that is something that is interesting, but I think that should live, obviously, above the base trust layer of the bridge. But this is something that is certainly interesting. But then when you're talking about should wrapped assets trade at a discount, you involve even more smart contract risk. You layer risk, risk, risk on top of each other. And they're the point of view X comes in that we've approached a couple times here.

Hendrik (12:50):

How does a user understand who they need to trust when I use this wrapped asset, when I use this bridge, when I use cross chain lending. And I think right now the user experiences do not really do that well. I think we've got a lot of work to do in educating users, giving them a reliable risk score, and then we can tap into these pools. But before, and especially as everything's moving so quickly, I'm kind of afraid in tapping into that. But as long as users are getting educated that this is happening, I mean, the bridges already allow that in a sense. Like for example, the Wormhole has message passing and you can add new layers on top, as we said, it's kind of like the TCP/IP layer. You can build a protocol that is more capital efficient on top of it and launch it today.

Austin (13:37):

Yeah. So let's talk for a second about that component of both moving things like NFTs and enabling protocols that are now moving cross chain. Something like Lido, which now exists in multiple chains, multiple layer ones. How is that communication being managed for something like that? And as a broad concept, not Lido specifically. And then what is the role of a bridge? Is that the right analogy to think of for something passing messages back and forth?

Bryan (14:01):

I also just want to chime in real quick and say that one of the things everybody right now is... Because you said you wanted to kind of touch on future. And I feel like everybody right now is focused on an individual coming like one user coming and wanting to bridge their assets from chain A to chain B. But my very firm belief is that in the future, 12 months from now, whatever, 95% of bridging is going to be driven by applications and not by users. Users will come and they'll use a Uniswap or they'll use whatever it may be that they're going cross chain and they'll be completely abstracted away from the bridging process. So it's not going to be driven by an individual user coming and saying, "Oh yeah, I'm doing this bridge. I'm accepting this risk, et cetera." It's going to be, how can you integrate that into an actual UI that's functional and makes sense. And the application is comfortable with whatever the trust assumptions are, if there are any, and yeah.

Austin (14:48):

Yep. So you see that layer moving from something that's more user facing, like a Venmo style experience, to something that's more like an interbank transfer.

Bryan (14:56):

I mean, I think the user, whether it's lending or whether it's swapping right now, I think the process is not going to be that you do some action in a protocol on chain A. You leave, you grab a bridge, maybe you have to jump through another chain and then another bridge and then like you go do something on the other thing. It's taken an hour, you've paid seven fees and switched wallets and got native gas. Like that just can't be the way that's going to happen. The user's going to sit in an application, do a transfer, and something is going to happen on the other chain. I think, everybody's sort of talking about that process of triggering arbitrary messaging on the other chain, but I think that has to live at that application layer, not at the individual user walking through this entire process piecemeal.

Hendrik (15:34):

I think that's a really good point because actually when you ask us about future, we also can only make assumptions. It's like, if you had asked me one and a half years ago, "Will I be trading Degenerate Apes and like getting yield on NFTs?" I would've said you, "Austin, are you crazy?" But now we're in this world and proof there's I think none of us can predict what exactly is going to happen. What we can do is design the bridges in such a way that we enable developers. And I think that's the key goal to build these experiences, to build new applications that can do all these things.

Austin (16:07):

Yeah. I love that. So talking about enabling developers. So if we go over to Andriy, you've been talking about, like on solana, you guys have bridged a ton of assets.

Andriy (16:18):

Yes.

Austin (16:19):

And that's not just going into direct people's wallets, oftentimes it's going into different dApps across solana. Talk about that developer work, how that integration works between the bridge and the application that the user's trying to use.

Andriy (16:31):

We were speaking the future. And that is exactly the future way of thinking about. It is like, we are calling this concept bridge as a service. Bridge, it is just the tool for users and for developers. So we would be more and more moving from the UI itself to some APIs and some connection with projects and developers. And this is how, for example, we built our whole strategy. We're not just the bridging assets. We bridge the asset and then on the destination chain, we partner up with Saber. We partner up with Orca. We create a flow because for users, the bridge, it is just like, it's a tall road and people they don't want to think about the road, they want to drive with their wife and kids from point A to point B. They don't care about the road.

Andriy (17:16):

And this is what happening here. And those bridges that would provide more flexible functionality. So for developers, it would be easier to build on top of them. Those are the ones that would succeed in future. And by future, I mean like six to 12 months from now. It is not distant future. It is not years. It is soon. This future is coming in soon. But in this sense, bridges is more like B2B business. Because I believe that other protocols and projects should be integrated with bridges, not user themselves. And we provide decentralized infrastructure, decentralized framework so that other protocols and projects can build on top of it.

Andriy (17:55):

And yeah. So for example, I think eventually like many projects and protocols, you'll want to kind of scale up and tap into user bases of other blockchain ecosystems like solana, for example, for project from Ethereum. And the main challenge here is to let actually protocols to build on top of this infrastructure. And in this case we don't need to have kind of censorship wide listing, et cetera. So we just need to provide kind of tooling so that any protocol can bridge their asset and any protocol can pass an arbitrary data cross chain that we will be executed in the target chain. We can actually let like protocols to decide on how they can do partnerships like with Orca or other dexes in other blockchains as well.

Austin (18:40):

So in a way we're talking about a composability layer for bridges.

Andriy (18:44):

Yeah.

Austin (18:45):

Interesting.

Hendrik (18:46):

And I mean to a certain degree, we're already there with applications building that on top. You already said Lido. Lido has staked. So they've staked Eth and then they get bridged to a protocol like [inaudible 00:18:57] and suddenly you have like a savings product. And that is what the user then consumes. This is the end user goal. I just want to put my money in and get interest or get some kind of yield and everything else is abstracted in the background. And I mean, this is one of the first steps and then we go further and further and further. We bring protocols truly like multi chain. Like if I hold COMP on solana, maybe I want to be able to participate in governance. I shouldn't lose that right on another chain and enabling this, but these are next steps. And I think to a certain degree we're already there.

Bryan (19:29):

Yeah, I think unified governance is something that's going to be a very hot topic over the next period. Almost certainly.

Austin (19:35):

Yes. Well, we'll have to do another one on cross chain governance protocol sometime later. Thank you all for joining us today.

Hendrik (19:41):

Thanks Austin.

Andriy (19:41):

Thank you.