In this episode of Lightspeed which took place on May 2, 2024, Dan, and Alex discuss how deBridge is working to power the crypto economy with cross-chain bridging & interoperability. Read our notes below to learn more.
Background
- Dan (Host) – Co-Host at Lightspeed
- Alex (Guest) – Co-Founder of deBridge
- deBridge – a cross-chain bridge solution
Bridging & Interoperability
- Alex says that efficient infrastructure is crucial for cross-chain operations due to challenges faced in rebalancing liquidity efficiently. deBridge was initiated to address these challenges after encountering limitations in liquidity management.
- He adds that the inception of deBridge stemmed from the necessity for a decentralized and efficient cross-chain transfer mechanism. Messaging infrastructure forms the foundation for interoperability, enabling value transfers between chains.
- Alex says that the initial approach using liquidity pools faced scalability issues due to bottlenecks in security, scalability, and capital efficiency. Continuous interest payments for liquidity providers posed challenges in maintaining profitability.
- He adds that security vulnerabilities arise from large TVL attracting hackers, making bridges prime targets for malicious actors.
- Alex says that liquidity constraints arise when attempting transfers exceeding pool liquidity, limiting functionality. Distinguishing between asset custody and bridging is crucial; many solutions attempt to combine both aspects. deBridge stands out by separating cross-chain asset custody from trading, avoiding confusion in functionalities.
Decentralization vs Performance
- Alex says that Ethereum leans towards decentralization, prioritizing security over performance. Solana focuses on high performance while maintaining decentralization to attract larger investors.
- He adds that Ethereum offers top-notch security but struggles with high gas fees unsuitable for small retail users. Solana provides a cost-effective, scalable solution appealing to retail users without compromising security. deBridge favors high-performance infrastructures like Solana for fast transactions catering to DeFi users’ demands.
- Alex says that they started building smart contracts within the Solana ecosystem before launching on Mainnet in May 2022. He emphasizes speed, security, and finality as qualities appreciated by retail users.
- He adds that Arbitrum and Optimism have centralized sequencers currently. The lack of decentralization and community governance is a concern. On the other hand, Solana is decentralized with thousands of nodes. It offers quick finality, crucial for applications like payments.
- Alex says that quick finality in Solana makes it convenient for various use cases. It enables seamless transactions akin to credit card payments.
The Intent Bridging Model
- Alex says that liquidity pools are replaced by an intent-based approach. Users specify slippage tolerance parameters and control execution.
- He adds that users incentivize actions through the intents they create. Specify rewards for desired actions, controlling prices effectively. Market makers fulfill intents, taking on associated risks.
- Alex says that intent-based protocols fill intent and unlock liquidity seamlessly for users, simplifying the process. Cross-chain swaps exemplify user intent where complexity is shifted to market makers or solvers behind the scenes. Market makers play a crucial role in fulfilling actions, emphasizing the importance of onboarding them for protocol success.
- He adds that onboarding sophisticated actors like market makers poses challenges due to their focus on large opportunities and reluctance towards development efforts. Bootstrapping intent infrastructure involves reaching out to market makers for liquidity provision, with initial challenges in attracting interest from major players.
- Alex says that institutional liquidity becomes a concern for large trades, prompting brainstorming sessions to find viable solutions. Initial ideas involve borrowing liquidity but face hurdles due to collateral requirements, leading to the exploration of alternative approaches.
- He adds that collaboration with Rockaway introduces a unique setup using an MPC wallet controlled by Rockaway for liquidity management without custody concerns. The MPC infrastructure enables efficient transaction proposals validated by Rockaway, fostering institutional-grade liquidity provision within the protocol.
- Alex says that Solvers Network’s establishment is very significant for the crypto landscape. He predicts that classical markets will transition on-chain due to blockchain infrastructure offering transparency, predictability, and accessibility to data.
- He highlights the importance of high-performance infrastructure for efficient markets with minimal latency. Blockchain ecosystems like Solana enable decentralized infrastructure for classical trading worlds. Companies like JP Morgan utilize permissioned systems through blockchain infrastructures for efficient liquidity transfers.
Bridging Mechanics
- Alex says that solvers are taking balance sheet risks to fulfill intents within a decentralized system. Solvers fulfill the intents with assets available in Ethereum Mainnet for desired swaps.
- He adds that solvers face challenges in swapping assets efficiently due to limited transaction sizes. Leveraging Jupiter API for aggregating liquidity to facilitate swaps efficiently within a single transaction.
- Alex says that for the reliability of market makers atomicity in swaps facilitated by Jito bundles is important. There are challenges related to non-atomic swaps and risks associated with multi-leg transactions.
MEV
- Alex says that the misconception that the solvers market is monopolized or centralized is debunked. It’s likened to Formula One racing, where there’s no second-best; only the best solvers with hyper-optimized infrastructure dominate. Around 300 different wallets engage in transactions, but only five or six solvers hold significant market share due to their superior infrastructure and efficiency. Competing with these top solvers proves challenging.
- He adds that dominance by top performers like Jaredfromsubway.eth in MEV opportunities on Ethereum is important. Their efforts focus on achieving user trades efficiently rather than decentralization for its own sake.
- Alex says that speed is a critical factor addressed by deBridge, emphasizing high performance for user benefit. Future iterations will introduce price discovery as an additional variable while maintaining a focus on speed. They are excelling at intent-taking jobs to secure dominance in the solvers market, akin to performing at one’s best in Formula One racing.
Fee Compression
- Alex says that they are providing incentives for instant settlement through API queries to help align user intents with efficient execution. A nominal fee of four basis points incentivizes solvers without imposing significant costs on users.
- He adds that proposals for matching intents directly between users to foster network effects are discussed, potentially eliminating the need for market makers or solvers in certain transactions. Establishing efficient liquidity rails remains a primary challenge, crucial for enabling market makers to rebalance liquidity effectively across different chains like Solana and Ethereum.
- Alex says that traditional methods of obtaining liquidity via centralized exchanges or platforms like Circle pose limitations during volatile market conditions due to liquidity shortages.
- He adds that institutional asset custody is slow due to its institutional nature, taking up to 30 minutes for $USDC transfers. Market makers need infrequent liquidity rebalancing, allowing them to tolerate the delay, while users experience instant settlement.
Bringing Liquidity On Chain
- Alex says that asset custody stands out as a significant challenge when establishing a new ecosystem or chain. Bridging assets across chains requires robust custody solutions like canonical bridges such as Arbitrum Custody Bridge or Optimism Custody Bridge.
- He adds that asset custody is crucial for minting real-world assets into digital forms on-chain. Trading infrastructure is vital post-deployment to facilitate efficient trading and cross-chain transactions seamlessly.
Bridging Risk
- Alex says that users face smart contract risks when interacting with DeFi protocols, emphasizing the importance of security audits.
- He adds that fast execution impresses people, leading to organic word-of-mouth marketing. Market makers bear most transaction risks. Risks include potential transaction failures on the source chain and messaging vulnerabilities post-transaction fulfillment.
- Alex says that cross-chain messages are relayed from smart contracts on the destination chain to those on the source chain for proof of intent fulfillment. Validators’ role in message validation reduces risks due to lower liquidity exposure compared to traditional systems.
- He adds that validators should provide financial guarantees beyond governance selection to ensure accountability. Governance can slash validators for misbehavior, reimbursing affected users or market makers for losses incurred.
- Alex says that transitioning risk management responsibilities from regular users to experienced professionals enhances system security.
Governance & Validators
- He adds that initial validator selection is based on performance metrics without a token yet; governance will later determine validator participation.
- Alex emphasizes the need to prioritize maximizing slash collateral and financial guarantees over simply increasing validator numbers. The current focus is on ensuring sufficient validators (11 at present), with potential for expansion while maintaining strong financial backing.
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Show Information
- Medium: YouTube (Video)
- Show: Lightspeed
- Show Title: Igniting Liquidity Cross Chain At The Speed Of Light | Alex Smirnov
- Show Date: May 2, 2024