Revelo Roundtable #9 - Bridging & Interoperability

In Revelo Intel’s Twitter Spaces which took place on April 11, 2024, Kirk hosted Nick from Across Protocol, Arjun from Connext, and Jon Kol from Hyperlane to discuss the complexities of blockchain interoperability, coexistence, competition, economic security, user experience, and more! Read our notes below to learn more.

Background

Kirk (Host) – Head of Business Development at Revelo Intel

Nick (Guest) – CTO at Across Protocol

Jon Kol (Guest) – Co-Founder and CEO at Abacus Works (core developer team behind Hyperlane)

Arjun (Guest) – Founding Contributor at Connext

Across Protocol – an interoperability protocol powered by intents

Hyperlane – a permissionless interoperability layer built for the modular blockchain stack

Connext – a modular protocol for securely passing funds and data between chains

Insights and Perspectives on Interoperability in Crypto

Nick shares his journey with UMA and the development of an L2 to L1 bridge as a use case to demonstrate the capabilities of the UMA Oracle, which evolved into a significant consumer application.
Arjun recounts his start in 2016, focusing on making Ethereum accessible to average users. He explains the evolution of Connext towards scalability and interoperability, pioneering the use of intents to simplify the user experience across blockchains.
Jon speaks about his experience since 2017 and the aim of Hyperlane as an open framework for interoperability to increase the scalability and demand for crypto, highlighting the importance of addressing scalability issues for crypto’s future success.
Kirk asks whether the bridging market is a winner-takes-all scenario and how multiple projects can coexist.
Arjun highlights the complexity of the interoperability problem and the evolving attitudes towards it. He argues against the winner-takes-all mindset, suggesting that the future will involve numerous bridges and chains, reflecting a market too vast for a single project to dominate.
Arjun talks about the benefits of having multiple options in the space, pointing out the modularity in bridging that allows for non-competitive coexistence and healthy competition among projects.
Nick explains that while there may be direct competition in areas where bridges completely overlap, the diversity of features and supported tokens will lead to a variety of successful bridges.
Nick anticipates a segmented market with multiple winners in different categories, driven by the specific needs and preferences of users.
Kirk comments on the nature of competition within the crypto space, suggesting that while healthy competition is beneficial, certain expressions of it can harm the industry as a whole, especially within the crypto Twitter community.
Jon introduces a counterintuitive perspective on the notion of winner-takes-all within crypto, saying that crypto differs from other internet sectors due to the unique affinity users have with the platforms they use.
He explains that users of a crypto app are likely to own the app’s asset, which alters their motivations and creates a different dynamic from traditional internet platforms.
Nick highlights that differentiation in the crypto space isn’t just about distinct assets but also involves factors like reputation and reliability. He compares it with banking options in the U.S. to illustrate that the market doesn’t always consolidate around a single winner, suggesting a similar dynamic exists in crypto.

Exploring Token Utilization Strategies in Interoperability Protocols: Balancing Revenue Sharing and Governance

Kirk asks about the optimal use of tokens in interoperability protocols, such as whether they should be used for revenue sharing or governance.
Arjun explains that bridge protocols have recognized three components in the interoperability protocol stack: transport, security, and intent layers.
He mentions that transport, the core infrastructure for message delivery between chains, is evolving towards modular security. Some protocols like Axelar have integrated in-built security, while others, including Hyperlane and LayerZero, opt for a model where an external provider ensures security for message passing.
Arjun notes that the core message bridging component remains complex and expensive, similar to the challenges faced by Ethereum L1. He highlights the necessity of a meta layer that batches user transactions to facilitate cross-chain operations.
Arjun talks about the role of tokens that should contribute to the economic security of the protocol, particularly in the security layer, by mechanisms such as staking.
For layers responsible for delivering messages between chains and the intent layer, tokens could manage incentives and ensure solvers follow rules to avoid negative outcomes.
Arjun says that tokens are ideally used to support the core missions of a protocol, making it more permissionless, secure, and reliable.
Jon highlights the importance of crypto incentives for advancing the goals of a protocol. He shares his enthusiasm for crypto’s potential to influence and reinvent the financial system through incentives.
Jon says that tokens are best used to make protocols as permissionless and accessible as possible, highlighting the ability of crypto incentives to bring diverse actors to the table.
Nick mentions Hyperlane’s natural use case for incentivizing economic collateral to secure messages across chains. Nick appreciates Jon’s perspective on using tokens in ways that benefit the protocol, especially if holding the token provides value, such as a claim on revenue.

Insights on Economic Security and Risk Management in DeFi

Nick says that their use of UMA Oracles aligns with AVS today and describes their model’s similarity to the Connext architecture. He highlights their goal to support more volume by allowing more frequent repayments, which would improve capital efficiency for relays.
Nick mentions the potential for accessing restaked $ETH to increase economic collateral, which could lead to faster repayments, and expresses interest in exploring the use of TVL behind the EigenLayer for bridges.
Arjun compliments the Across Protocol, emphasizing the importance of innovative security measures like restaking to enhance system security for users. He appreciates their openness to evolving beyond traditional mechanisms and recognizes them as valuable competitors in the space.
Jon shares insights on the practical disregard for security among primary users, particularly new chains at launch, which may not immediately require high-security levels. He discusses the nuanced value of economic security, highlighting its effectiveness only when assets are genuinely at risk.
Jon compares the market for economic security to the insurance industry, noting the variance in perceived value based on collective versus individual investment in security.
Nick asks about the actual value of unstaked economic security due to its reduced risk. He points out the need for a nuanced approach to slashing policies that consider the severity of infractions, suggesting that a one-size-fits-all strategy may not be practical or effective.
Jon discusses the complexity and risks involved in staking, highlighting that different risk profiles emerge with the concept of slashing, comparing it to his experience as a bond trader.
He notes the lack of unified risk metrics in DeFi protocols, making judgments on security more complex for the average depositor.
Nick adds that in the long term, Liquid Restaking Tokens (LRTs) could resemble bonds with varying grades, affecting their pricing. He highlights that currently, LRTs are priced similarly, but anticipates diversity in pricing based on risk profiles once slashing comes into effect.
Jon says that LRTs are all trading as if AAA-rated, but their real-world risk could range significantly once exposed to slashing.
Kirk talks about the idea of creating a protocol to manage these risk profiles, aiming to simplify and abstract the risk management aspect for a better user experience in the LRT space.
Arjun reflects on the tendency in the crypto space to innovate extensively, only to realize retrospectively that they’ve reconstructed existing financial primitives. He views this as a sign of the industry maturing but remains cautious about adopting standard financial metrics like those from Moody’s.
Nick talks about the difficulty of pricing bonds in traditional finance, noting that credit is still traded over the phone due to these challenges, hinting at the complexities facing the LRT and broader DeFi space.

Insights into Crypto Security: Learnings and Strategies

Kirk talks about enhancing security in cryptosystems, specifically asking about lessons learned from issues like the Wormhole and other large bridging protocols.
Jon highlights that all systems are prone to exploitation, advocating for a shift in mindset towards more cautious development similar to aerospace engineering.
He stresses the high stakes in crypto where small mistakes can have massive repercussions, unlike more forgiving environments like Google.
Jon discusses the importance of preparing for breaches by adopting best practices in development, simulating potential failures, and establishing protocols for incident response, such as setting up a war room as they did following the Nomad hack.
Jon explains that Hyperlane allows for the integration of various state attestation or proof modules to adapt to the latest security standards. He underscores the need for thorough review and security-conscious development practices.
Arjun adds that bridges have a bad reputation due to their similarity with scalability and the importance of building blockchains. He notes that blockchains have been robust since 2008, with most chains based on the Bitcoin code base, indicating a long period of testing before innovative developments.
Arjun points to IOTA as an example of struggles faced by projects with entirely novel code bases due to critical, persistent issues. He advocates for leveraging battle-tested components as much as possible and emphasizes modularity to secure different aspects of a project.
Arjun highlights the importance of a cautious approach, methodical rollouts, and leveraging ecosystem support to minimize risk, acknowledging that critical vulnerabilities can still be found in core protocols decades after their creation.
Nick highlights the importance of a project’s history of not being hacked as a sign of building defense over time. He values openness, public development, and community engagement in security discussions as these practices expose vulnerabilities to potential attackers, enhancing robustness.
Nick highlights the significance of reputation in the DeFi space, noting that the Nomad team had a great reputation despite the bug incident. He advocates for cautious, slow-building and regards a culture that avoids shortcuts as indicative of reduced risk of errors.

Towards Seamless Blockchain Interoperability: Challenges and Visions

Kirk talks about the end game for interoperability, expressing interest in connecting various Layer 1 blockchains and virtual machines, such as EVM, Solana, and Cosmos, to enhance user experience by unifying all blockchains.
Jon says that their motivation for building Hyperlane was to unify all chains seamlessly through a permissionless system. He mentions that while it’s not critical to have all chains unified, having major ones is important.
He shares his experience with Rabby Wallet, which simplifies the use of multiple chains by abstracting some complexities, but still treats chains as separate entities.
Jon highlights their work on bringing the concept of interchain accounts from Cosmos to EVM, allowing contracts on one chain to own contracts on other chains for a unified user experience.
He envisions a smart wallet that can execute actions across multiple chains without direct user interaction on each chain, aiming for a less fragmented user experience.
Nick adds that the key to interoperability is building fast, cheap, and secure token transfers across different chains.
He highlights the importance of speed, user experience, and cost, suggesting that these objectives could be achieved through various means, including protocols like Connext and messaging networks like Hyperlane, which should support numerous chains and tokens.
Arjun highlights the role of roll-ups as future servers for decentralized applications. He stresses the importance of these servers having internet connectivity for effective blockchain interaction.
Arjun notes the challenges in achieving secure messaging between blockchains, pointing out the need for significant advancements in zk-proof technologies for synchronous chain interoperability. He remains uncertain if such seamless communication across all blockchains will ever be feasible.
Arjun mentions that current technological constraints could hinder user experience. He says that interoperability solutions should separate transport and security from user experience, akin to the Layer-1 and Layer-2 distinction in blockchain architecture.
Arjun explains the envisioned end state for blockchain interoperability, highlighting the potential of protocols like Hyperplane to underpin security and transport mechanisms, while user-friendly systems like Across and Connext abstract complexity for developers and users.

Economic Security, AVS Exploration, and Future Plans

Jon outlines key developments for Hyperlane, including new forms of economic security, efforts to make the protocol easier to deploy on new chains, and excitement over various applications building with Hyperlane. He hints at upcoming launches but refrains from revealing too much to avoid spoiling marketing plans.
Nick finds the AVS question intriguing as a DeFi participant and for Across specifically, expressing interest in exploring its potential to enhance capital efficiency and recycling through three layers.
He mentions the recent release of a standard with UniswapX, aiming to partner with them to share fillers across protocols, leverage their advantage in auctions and intents, and settle those intents on Aross, where they have a bridging advantage.
Arjun reflects on Q1, 2024, highlighting the team’s goal to reignite growth by solving problems for projects wanting to abstract away the chain experience. He mentions Connext’s success in becoming the largest protocol by bridge TVL from Ethereum and one of the largest by volume, viewing it as validation for their long-term vision.
Arjun discusses future focuses, including moving beyond the Proof-of-Concept stage to support a broad number of chains and assets and scaling the intent model across ecosystems. He mentions developing a solution for settling intents across numerous chains, promising more announcements, and expressing interest in collaborating with Nick on these challenges.

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Show Information

Medium: Twitter (Audio)
Show: Revelo Intel Twitter Space
Show Title: Revelo Roundtable #9 – Bridging & Interoperability
Show Date: April 11, 2024