Ramble on cross-chain: The competitive differentiation of cross-chain aggregators
The word “cross-chain” comes from the fact that the source and destination assets are deployed on two separate blockchains in cross-chain trading. At the same time, execution occurs after crossing two or more separate blockchain networks.
With the congestion and high fees on the Ethereum network, asset spillover effects become more apparent. The emergence of the cross-chain bridge breaks the blockchain island and expands the space for the development of the DeFi ecological. The smart money has the opportunity to shuttle back and forth in the public chains in search of a higher-yielding “Bonanza.” However, opportunities face costs. With the expansion of multi-chain ecology, more than 100 cross-chain bridges bring lots of path choices and increase the complexity of choice for users. If you’re interested in the performance, classification, and future trends of major cross-chain bridges, Review Dr. DODO’s article “Ramble on cross-chain: An in-depth analysis of trade-offs for 16 cross-chain schemes.”
The cross-chain infrastructure is one of the lowest constructions in building a multi-chain and multi-layer blueprint. The cross-chain aggregator has an indispensable role in the transaction function of cross-chain aggregation in the cross-chain territory. It has a clear goal to reduce the difficulty of transactions through the algorithm that can provide lower transaction costs screening faster, higher security, and other advantages of the path for users to carry out the optimal cross-chain transaction path.
In addition, what are the differentiating advantages of cross-chain aggregators? How do they fulfill their cross-chain asset requirements? Why is a cross-chain aggregator necessary? With these questions in mind, let’s start with the existing five cross-chain aggregators. We analyze the current situation of cross-chain aggregators and interpret how cross-chain aggregators expand the development space. Also, we open up assets and data based on asset cross-chain aggregation transactions and move toward a multi-dimensional, multi-chain, and multi-layer ecological universe.
Label: Cross-chain function + aggregation transaction
We can describe the characteristics of Li.Finance (Li.Fi) in one word: it is Paraswap and 1inch with cross-chain bridge functions. In combination with the DEX aggregator and cross-chain bridge, Li.Fi realizes the dual functions of cross-chain swap and cross-chain yield farming strategies. It carries the cross-chain function of the on-chain assets of the cross-chain bridge. In short, you can swap any token on any (supported) chain for another token on another chain.
The cost of this process is relatively high. Suppose a user wants to swap ETH from Ethereum for BNB on the BNB chain. The user needs to exchange ETH for USDC, transfer assets to the BNB chain through the bridge, and convert USDC into BNB. The cross-chain bridge handling fee and gas fee that users need to pay are not small expenses.
Take the Li.Fi’s transaction path as an example, let’s look at the hidden costs. When users confirm the transaction, they are faced with the following choices: which cross-chain bridge to choose as the cross-chain path; which DEX to trade on; after all these cost considerations, is there a more efficient, convenient, and cheaper way to trade? Finally, the security of the smart contract for cross-chain bridge and DEX is another consideration.
Li.Fi integrated cross-chain bridge capital resources, and linked DEX and DEX aggregator to break down the difficulty in choosing. After receiving a user’s transaction request, Li.Fi will automatically evaluate the possibility of the request and score the security, speed, and other aspects of the path according to multiple indicators to give an optimal path.
At the user level, the whole process is: input the transaction, wait for a few seconds, get a method of assets transfer and exchange, check the transaction process, sign several times to confirm the cross-chain and assets swap, and complete the transaction. Li.Fi also gives users a high degree of freedom in choosing the slippage setting, cross-chain bridge and DEX scheme. After reducing the cost of “choice” for users, Li.Fi provides a more efficient utilization of capital.
Compared with the cross-chain bridges, Li.Fi highlights the following advantages of cross-chain aggregators:
- More diversified cross-chain trading paths: currently, cross-chain bridge only supports stablecoin and relatively original assets on a single public chain, so cross-chain asset trading often cannot meet users’ demand. The role of DEX and DEX aggregators cannot be eliminated when users trade assets across chains. Li.Fi integrates the three parties of the cross-chain bridge, DEX and DEX aggregator, and provides DEX for token swap in both source and destination chains. With a wider range of cross-chain currency exchanges, the transaction path of required tokens is more likely to succeed.
- Broke the liquidity deadlock and improve the capital efficiency: At present, DEX has multiple copies of identical liquidity pools in pairs on each public chain. If the number of copies of liquidity pools is multiplied by the number of different AMMs on each chain, users will find that this system is very inefficient and fragmented. By integrating transaction data from other platforms, cross-chain aggregators create deeper pools of liquidity within the same ecosystem, completing the existing system that is inefficient and fragmented.
- After optimizing transaction security, the transaction path becomes more effective: When integrating with cross-chain bridge, DEX and other partners, Li.Fi will conduct technical evaluation and review first, which is equivalent to reducing certain “systemic risks” such as the security of smart contracts; Secondly, the context technology is used at the bottom of Li.Fi, and the algorithm is used to score the security, gas fees, speed, and other influencing factors of each path, to provide a smoother and optimal trading path.
The Aggregators do more than a bridge. The essential function of cross-chain aggregators is “bridging + aggregation transaction,” which opens up transaction functions with financial attributes such as liquidity mining and loan facilitation from the level of asset swap, allowing users to aggregate liquidity of different ecosystems. It is the building block of a multi-chain world. In addition to improving capital efficiency, cross-chain aggregation is another solution for on-chain liquidity management. Li.Fi currently relies on external channels for its liquidity. In other words, the current integrated public chain, DEX, and DEX aggregator are the core elements to provide cross-chain path trading advantages. In a sense, we think Li.Fi is the point cut in the world of cross-chain aggregators. After all, compared with the other four aggregators, it precisely focuses on the cross-chain aggregation transactions.
Given a choice between security and decentralization, Li.Fi prefers the latter. Li.Fi’s algorithm evaluation criteria for calculating the optimal path have never been disclosed. What users know is the optimal path after a “centralized evaluation.” Furthermore, Li.Fi’s smart contract is open source, but the API is not. The Li.Fi back-end interface has two “killer” termination switches. One is at the API layer, where path calculations directly ignore bridges under attack or at the “risk” level. The second is in the smart contract layer, where Li.Fi or the project can turn off the integration interface when the protocol party encounters a hacker attack.
More centralized cross-chain aggregator measures are designed to protect against hacker attacks with higher smart contract security, but cross-chain aggregator protocols increase counterparty risk. On March 20, 2022, hackers stole about $600,000 in tokens from 29 wallets due to a vulnerability in the swap function of Li.Fi contracts. In retrospect, Li.Fi wasn’t the only cross-chain aggregator stolen.
Label: X Swap + Y Pool, Linkage the Metaverse
XY Finance’s project features dual functions of X Swap and Y Pool. X Swap in XY Finance takes on similar responsibilities to Li.Fi, namely cross-chain swapping and aggregated trading capabilities. When a user makes a transaction request, XY Finance will create a single transaction from the source chain to the destination chain, looking for the optimal path, and the security of the transaction depends on the decentralized consensus mechanism.
XY Finance’s Y Pool is an upgrade of asset liquidity and differs from Li.Fi in liquidity. Y Pool is a single currency liquidity management pool that can manage the liquidity of the same asset in multiple chains. Currently, Y Pool supports the USDT and USDC tokens. For example, the USDT Y Pool can receive USDT assets on various chains, such as ERC-20 USDT, BEP-20 USDT, and Polygon USDT. Users can save ERC-20 USDT, BEP-20 USDT, Polygon USDT into USDT Y Pool and get Pool token xyUSDT. These different USDTs will be used to provide liquidity for X Swap. xyUSDT holders can earn swap fees generated by X Swap and get XY tokens as rewards by staking xyUSDT.
The demand for trading will likely shift much of the liquidity to the other chain, resulting in an imbalance in the proportion of assets in each chain of the pool. XY Finance has therefore introduced rebalancing incentives. Users can call the rebalance function to the rebalance liquidity on each chain in the Y Pool. Users who help rebalance liquidity in the Y Pool will also get rewarded with XY tokens.
Assume that the proportion of the assets in the USDT Y Pool is unbalanced, the Ethereum USDT is 0.1 M, the USDT on BSC is 10 M, and the USDT on Polygon is 50 M:
1)Alice chooses to call the rebalance function and calls 20M USDT from Polygon to Ethereum pool, then the balance in each chain will be: Ethereum: 20.1 M, BSC: 10 M, Polygon: 30 M;
2) According to the formula, the balance ratio is R2 = 0.75 =75%;
3) Assume that the maximum XY token reward amount (m) is 1,000; Alice will end up with (0.75–0.0062) * 1,000= 748.3 XY tokens.
4)USDT Y Pool will rebalance the proportion of USDT on different chains in the pool according to the algorithm formula.
The mechanism of X Swap and Y Pool is essentially to manage the liquidity of different chains and motivate users to become the provider and balancers of the liquidity of assets on the chain. Y Pool has created its liquidity pool to meet X Swap’s trading needs, and X Swap’s trading fees subsidize the liquidity providers of Y Pool.
Although XY Finance cannot customize the slippage and charge users, users of XY Finance can choose the most appropriate path to trade according to their personal needs and preferences after understanding the cross-chain exchange path.
Another core of XY Finance is XY token. XY token is the original XY Finance token, and veXY is a typical ve-Model token. XY token holders can participate in various governance proposals by staking. Locking XY tokens will improve liquidity mining returns. The longer the lock is, the higher the return will be.
Generally, X Swap and Y Pool have established a complete cross-chain exchange mechanism for XY Finance. With the addition of governance token XY, users are not only encouraged to provide liquidity but also bound to the long-term interests of the agreement. Under the two businesses of GalaXY Kats of Play-to-Earn and NFT Satellite, XY Finance shows the vigorous ambition of linkage Metaverse and expansion of financial business.
Label: four-tier architecture, one-stop trading
A cross-chain transaction aggregator similar to XY Finance is O3 Swap. O3 Swap was created by O3 Labs in 2017 and is a cross-chain aggregation protocol based on PolyNetwork. The core function modules of O3 Swap are O3 Aggregator and O3 Hub, which are stacked to complete the cross-chain aggregation transaction service. O3 Aggregator assumes the role of transaction aggregator and is responsible for integrating DEX on different chains. O3 Hub is a liquidity hub for cross-chain transactions, enabling users to provide on-chain asset liquidity.
Similar to the Y Pool of XY Finance, liquidity providers can deposit single or multiple same assets in different chains in O3 Hub and obtain O3 tokens as a reward by staking LP tokens. At present, O3 Hub has many choices.
It is not difficult to see that O3 Swap has the fundamental functions of a cross-chain aggregator, namely, liquidity aggregation and cross-chain exchange. Coupled with the issuance of the O3 Swap token, the path of decentralized governance and community-driven development is clear. XY Finance cannot carry out highly differentiated competition only through the above two characteristics. So, what makes O3 Swap unique?
The first is its four-tier architecture design. The newly released O3 Swap V2 (O3 Interchange) release showcases O3 Labs that want to create a one-stop cross-chain transaction.
The V2 design is more architecturally complex. O3 Swap is responsible for aggregating DEX and DEX aggregators on the source and destination chains, bringing a more diversified choice of tokens for cross-chain exchange. O3 Bridge is composed of two parts: PTMCs (linked Token Management Contracts) based on the protocol layer and NPAPs Pools (NativeToken & PeggedToken AMM Pools) based on the liquidity layer, which is a cross-chain asset trading channel. Swap and bridge allow a one-click transaction process. Users can also purchase in O3 Gas Station for the transaction of gas fee. The transverse line extensions enrich the application’s playability and provide users with a one-stop trading experience.
In addition, the V2 version of the liquidity layer has a further breakthrough. The liquidity layer comprises two parts; one is DEX integrated by O3Aggregator, which is similar to Li.Fi. SushiSwap, PancakeSwap, and other DEX will assume the responsibility of the same chain exchange function. The other is O3’s unique NPAPs pool, an AMM pool consisting of tokens and anchored tokens (pToken ) based on a burning-minting mechanism. Tokens enter through the Liquidity Entry Chain, and users can mint equivalent amounts of pToken on the Liquidity Entry Chain or other chains. Each pToken on each chain corresponds to a separate PTMC running on the PolyNetwork.
It is worth noting that liquidity providers then have two trading patterns. The first is Peg which users obtain pToken on the Peg tokens of the liquidity entry chain or other chains; Instead, users can unbind the pToken back to the liquidity entry to redeem the token. Another transaction pattern is Barter, where users exchange token and pToken directly in the AMM pool of the same chain.
In the AMM pool, token: the initial ratio of pToken is 1:1. However, as users perform Barter trades to arbitrage, the balance in the pool is broken. However, users’ arbitrage behavior has become a means to adjust the balance of the O3 liquidity pool.
1) Assume that token A’s liquidity entry chain is the main network of Ethereum, and the number of token A in the pool is greater than the number of pA at the moment;
2) Later, the user finds that the number of token A in BNB chain pool (m) is lower than that in pA (n);
3) The user chooses to exchange m token A for n pA, and then unpeg the n pA with the Ethereum’s main network to obtain n token A;
4) Ethereum and BNB pools will be rebalanced and users will get “(n-m) *token A” arbitrage profit.
Obviously, the mechanism design of V2 is more complex and greatly improved and optimized in the liquidity layer. The more flexible and diversified business classification further amplifies the unique one-stop aggregation trading advantage of O3 Swap.
Tags: Asset, Data, Application cross-chain system
So far, it is clear that the cross-chain aggregation business is a strong point for XY Finance and O3 Swap to gain a foothold in the multi-chain universe. ChainSwap is the same. However, in addition to multi-chain and multi-asset cross-chain aggregation, ChianSwap wants to build a huge cross-chain ecological Hub; ChainSwap Hub.
From assets to applications, from proxy networks to intermediate chains that support cross-chain functionality, ChainSwap’s four pillars support an ultimate cross-chain ecosystem.
The ChainSwap Bridge Aggregator is responsible for bridging aggregation. Like other cross-chain aggregators, API aggregate data and back-end work from various cross-chain solutions currently supported by AnySwap, PolyNetwork, Wormhole, and cBridge. Integration with Rango, a multi-chain DEX aggregator, also reveals how ChainSwap empowers apps and creates a hub of intelligence.
Of course, ChainSwap is closer to DEX Uniswap in UI design.
Another function of ChainSwap Bridge Aggregator is to aggregate ChainSwap’s native projects, such as ChainSwap native bridge V2. Its pre-set decentralized coin-issuing mode can optimize the management process and improve the efficiency of coin-issuing. Of course, according to ChainSwap’s documentation, the Liquidity Bridge they plan to build is a “Burnt/Mint” mechanism that will provide cross-chain services for mainstream assets and support liquidity providers to stake single tokens.
At present, we believe that ChainSwap differs from XY Finance and O3 Swap. It chooses to start from the original project of the cross-chain bridge to solve a major problem of insufficient liquidity at the cross-chain asset end. After all, ChainSwap Hub is its ultimate goal. ChainSwap aggregates many public chains and on-chain DApps, such as cross-chain aggregator, cross-chain DEX, NFT cross-chain, etc., to connect lending and derivative transactions from asset and data levels. The result will be an intelligent platform that integrates applications and tools across chains, a parallel hub that allows users to access and complete multi-chain transactions with one-click.
label: Point-to-point settlement, cross-chain communication protocol
FundMovr completed its rebranding in February 2022, changing its name to Bungee. The business line is straightforward. The advantages of cross-chain aggregators are to aggregate cross-chain bridges, DEX, and DEX aggregators to find available routes. It can meet the requirements of bridging according to the maximum output of the destination chain, the lowest gas fee for transactions and transfers, the fastest bridging time, and other factors.
One of Bungee’s strengths in user experience is that it has laid out three applicable routes for users. Compared to other cross-chain aggregators, the choice under path selection “really” comes back to the user. You can choose any of the three paths with the fastest speed, lowest gas fee, and highest rate of return for your personal preference, like Li.Fi, Bungee currently charges no fees.
Bungee added a point-to-point settlement model to Li.Fi to achieve bridging trading. For example, suppose Alice wants to transfer 100 DAI from Optimism to Arbitrum, and Bob wants to transfer 50 DAI from Arbitrum to Optimism. Bungee will settle DAI in a form similar to the order book. It only needs to transfer the remaining 50 DAI in Alice’s transaction from Optimism to Arbitrum. This approach maximizes the efficiency of the liquidity pool and is a cost-effective option. But it is also a challenge to the depth of liquidity. If the chain trading volume is insufficient, such a model cannot play its advantages.
As a new project was in beta, Bungee’s path options were limited, and liquidity was not deep enough. In addition, we take a look at Bungee’s deep business logic from the perspective of sockets.
Socket approaches multi-chain ecology from a technical point of view. It creates a meta-layer to enable multi-chain shared liquidity and state unification of DApps. Protocols can integrate API interfaces to achieve seamless two-way transfer of assets and information bridging. Currently, low-level sockets like Zapper, Zerion, and Ambire Wallet are supported by the Socket API. Developers can also take the Socket as the basic layer of technical architecture and build an interoperable DApp after customized optimization.
In our opinion, Bungee, as a native project of the Socket team, is an external output of the team to show the core technology. Such a brand example is a starting point for cross-chain communication protocols.
We have completed the business implementation and core elements of these five cross-chain aggregators. Next, let’s briefly overview the project progress of these five cross-chain aggregators based on the currently supported public chain / DEX / DEX aggregators, differences in transaction functions, user experience and other factors.
The data in the table is as of April the 22nd,2022
The product comparison form (Chinese Version) can also be viewed by clicking on the Google Docs link below:
Back to another question from the beginning: Why is a cross-chain aggregator necessary? The main points we summarized are as follows:
1) Efficient liquidity makes the transaction cost of cross-chain aggregators lower
The cross-chain bridge has a single function and can only be responsible for the back and forth “transportation” between stablecoin and native token. The lack of composability will be far from meeting the actual needs of users. When cross-chain bridges use the wrapped token as the medium token to solve liquidity problems, increased transaction complexity reflects on the user as unnecessary overhead and poor user experience. More importantly, when users compare the advantages and disadvantages of each chain bridge and DEX, they are paying repetitive and inefficient work costs.
2) Cross-chain aggregators have a better user experience
The cross-chain aggregator aggregates the cross-chain bridge, connects the DEX and DEX aggregator, and shortens the time required to query the token exchange path. Users can choose any way to carry out the entire asset exchange process. For users, cross-chain aggregators have improved greatly in usage, convenience, and financial efficiency. All cross-chain bridges, DEX and DEX aggregators can be used to aggregate together and find all available routes. They can then help users transfer assets between different blockchains in an optimal way based on factors such as maximum output on the destination chain, minimum gas fees for transactions and transfers, minimum bridging times, etc.
3) Cross-chain aggregators reduce the costs of development, decision making, and administration
The development of cross-chain ｂｂridges is still immature, which means safety risks, illiquidity, and large maintenance costs. As a third party, the cross-chain aggregator maintains all collaborative cross-chain bridging capabilities and handles user decisions programmatically. Cross-chain aggregators are a “backup” solution for technology developers.
4) Cross-chain aggregator business is not limited to asset cross-chain
Cross-chain aggregators point to liquidity aggregation and aggregation cross-chain bridge protocols required by asset cross-chain. Also, they point to data, application, and other cross-chain communication when XY Finance, O3 Swap, linkage metaverse, or a one-stop trading platform is created. The coin issued by XY Finance and O3 Swap, in addition to being a reward for liquidity providers, also indicates that decentralized governance and a community-driven model are developing.
5) Two-way transmission of assets and information, the cross-chain aggregator is an important component of the multi-chain universe
In the case of Web 2, a cross-chain aggregator is a bridging version of an online shopper website, a small part of a multi-chain ecosystem. It breaks down the seamless two-way transmission of assets and information barriers and creates a more flexible user experience. The cross-chain aggregator is not limited to the cross-chain portion of the asset but is more like a function key. Whether at the technical level, focusing on cross-chain convergent transactions, or business expansion based on this, it is trying to open the door to the multi-chain trading universe. As we all know, DeFi has huge energy, asset efficiency is the most intuitive demand of users, and cross-chain asset is the most attractive piece of meat.
As mentioned in the introduction, cross-chain aggregators have an obvious advantage in fulfilling user asset transformation needs. Convenient trading of hot assets, uncomplicated trading steps, significantly reduced transaction costs, and high capital efficiency can lock non-technical user portraits. The sore points of early cross-chain aggregators are also obvious. The imperfection of functions and lack of liquidity means poor user experience. One of the main reasons users use cross-chain aggregators is to improve transaction efficiency. However, when submitting a transaction request with the attitude of rapid success, it is often found that the appropriate trading path cannot be found, and the sense of loss will be heightened.
- This is when Bungee swaps Ethereum’s USDT to BNB’s BNB, but the inability to confirm the transaction path is not unique to Bungee. The track for the cross-chain bridge is being reshaped, and the likelihood is being increased.
The hot project LayerZero broke the deadlock of the current cross-chain bridge from the underlying architecture. The emergence of cross-chain bridge comparison tools such as BridgeEye improves the cross-chain infrastructure. The cross-chain DEX THORSwap is based on THORChain, which Ryan Watkins calls a decentralized cross-chain liquidity protocol that can replace exchanges and custodians. New projects such as Swim Protocol, which combines Wormhole bridging technology and AMM mechanism, also provide new development ideas for cross-chain liquidity to break blockchain islands. Managing on-chain liquidity is an unavoidable topic in the future development of cross-chain aggregators.
As the source of liquidity, Li.Finance has XY Finance and O3 Swap, which choose external agreements or create the original liquidity pool. ChainSwap and Bungee, the former chose to refine origin cross-chain bridges to improve token supply, while the other chose point-to-point settlement to improve capital efficiency. On the other hand, the four cross-chain aggregators besides Li.Finance continue to explore the combinable road of cross-chain liquidity with cross-chain aggregation transactions as the point cut.
Traceback to the source, the cross-chain aggregated transaction is a direction of capital efficiency and on-chain liquidity management for DeFi in the future, but it is not the only one. Its and DeFi’s development complement each other. In our opinion, when more public chain ecology emerges, and multi-chain becomes possible, the cross-chain aggregation transaction is likely to become a regular business of DeFi ecology. The DeFi’s exploration of on-chain liquidity, such as cross-chain liquidity mining incentive policies, “active market maker” trading mechanism, LaaS (Liquidity as a Service) and other DeFi innovation trends may direct the future development path of cross-chain aggregation.
At the same time, hacking incidents caused by contractual loopholes are frequently occurring. In addition to Li.Fi mentioned above, ChainSwap and O3 Swap also faced similar shocks of varying degrees. On July 10, 2021, ChainSwap was hacked to the tune of $8 million; On August 1, 2021, as the underlying protocol Poly Network was breached by hackers, $610 million was looted, and the market-making funds were locked in O3 Swap also suffered significant losses. When looking into the future development path, we find that how to prevent security vulnerability attacks effectively is one of the urgent problems to be solved for cross-chain aggregators.