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As the crypto sector continues with its gradual recovery from the 2022 winter, a new generation of modular blockchains appears ready to take over from centralized exchanges and bridges.
The public blockchain industry grew from less than several million dollars in the past ten years to a $1 trillion sector. Nevertheless, one thing that the industry is yet to achieve is a secure, decentralized, and interoperable solution.
Let us take Ethereum to Bitcoin, the biggest blockchain network, as an example. In the past, centralized exchanges have been one of the few safe, viable solutions that shift from one chain to the other.
BitGo, a centralized solution provider, offers the biggest pool of liquidity for Ethereum users to gain some Bitcoin (BTC) exposure through Wrapped Bitcoin (WBTC). The BitGo IOU is known to account for more than 93.6% of the Bitcoin bridged to Ethereum. Users need to rely on BitGo partner platforms like CoinList or centralized exchanges to exchange BTC and WBTC.
The WBTC’s dominance exposes it to evident centralization and regulatory risks. RenBTC, a platform that was managed by Alameda Research, dissolved in December 2022 after FTX’s implosion, and the same fate might await BitGo. The recent regulatory crackdown on Paxos for issuance of the US dollar-backed Binance USD (BUSD) stablecoin may also eventually bring the services like BitGo into the US Securities and Exchange Commission’s crosshairs.
Notably, interoperability between smart contract platforms and other application-specific blockchains must also get developed. Sidechains and rollups on Arbitrum, Polygon, and Optimism consist of 90% of the cross-chain bridge volume from Ethereum. Near’s Rainbow and Fantom bridges are the only available independent blockchains that have significant total value locked (TVL) on bridges with Ethereum.
A few major crypto projects, including Cosmos and Polkadot, implemented modularity from the ground up to create a secure, scalable cross-chain platform, with the eventual goal being to establish an interoperable “network of networks.” But, Cosmos is yet to attract enough liquidity to its network, and Polkadot continues to remain in development.
Bridge Centralization Issue
The 2021 hype cycle resulted in the emergence of a multichain feature where different blockchains host particular functions but are interconnected via interoperable solutions. The first generation of bridges was majorly primitive and centralized, eventually making them major targets for exploits and hacks.
In that context, the next generation of interoperable solutions operates as separate blockchains to feature decentralization and boost security. They include intermediate transfer tokens like THORchain’s RUNE. Nonetheless, the daily volume of transfers through THORchain has remained below $20 million, indicating that it has failed to pick up usage.
Interestingly, Threshold, which introduces a trustless and private portal for Bitcoin on Ethereum, will launch in Q1 2023. It will aim to replace centralized providers like BitGo in bridging between Ethereum and Blockchain.
Some of the other protocols focus on the interoperability between smart contract platforms.
LayerZero is an omnichain interoperability protocol that supports the development of applications like decentralized exchanges (DEXs) and lending protocols on top of it. The protocols can interact with monolithic chains like Cosmos Hub, Ethereum, and Solana. In that context, Stargate is the first decentralized exchange developed using LayerZero and comes with a liquidity of $324 million across Polygon, Avalanche, Ethereum, and BNB Smart Chain.
Celestia is a layer-1 blockchain developed using the Cosmos SDK. This platform supports smart contract execution but is just responsible for ordering transactions and making a blockchain’s data readily accessible.
It strives to work as an intermediate layer between Ethereum rollups and the mainnet by compressing the rollup data for quick execution on the Ethereum layer 1. Celestia does not validate the block data but assists in optimizing the gas cost and speed of execution. This capability is designed to extend to layer-1 blockchains like Solana, Cosmos, and Avalanche.
The developers are expected to run an incentivized test in March 2023 to begin public testing and reward testnet validators with a possible airdrop of native tokens.
The team that is developing Fuel Network, Fuel Labs, also created the Fuel Virtual Machine and Sway programming language, which boosts transaction speed. The developers unveiled the project’s second beta testnet in November 2022, and the public testnet is expected to go live in 2023.
While the interoperable sector is still underdeveloped and exposed to centralized risks, different teams are currently working on decentralized solutions that are set to launch later this year. The protocols will safely link the liquidity across various decentralized finance (DeFi) protocols and other layer-1 blockchains.
Furthermore, they will also help in building a multichain future, where the user experience will become blockchain agnostic and protocols will interact smoothly with one another.