The DeFi space is yet to gain momentum, even with the upsurge that we experienced over the last two years. The hidden potential of a real exploit in mass usage is really a thing yet to come. And we’ll tell you why.

As developers started to build out useful applications that gained significant traction, it became clear that Ethereum, despite its dominance, was not going to be able to sustain myriad applications all serving massive audiences at the same time.

By design, Ethereum’s base layer was not sustainable for some types of applications, and so the competition for alternative solutions began. Solutions were built as L2 networks on top of Ethereum, but also as entirely separate blockchains. And while projects like Polygon and other L2s gained traction, projects like Solana, Avalanche, Fantom, and others started to gain market share due to their abilities to handle transactions at a much higher rate. At this point, it became clear that the future of crypto is going to be multichain in some form or another, and there was no way around it.

Such a universe brings out the true colors and spirit of the cryptocurrency industry. It’s competitive, fast-paced, and experimental, all of which results in the ultimate innovation. This innovation progresses faster than any other industry because the lego-like implementation allows for experiments to compete with each other, build together, and allow for the best products and projects to succeed or decay. With regards to decentralization and freedom, blockchains are an incredible tool for the digital world.

The Problem

Currently, users are stuck inside one ecosystem because of the lack of tooling necessary to migrate seamlessly between blockchains. Indeed, there is a serious urgency for cross-chain tools, like wallets and dApps, to achieve the full vision of a multichain environment.

The foundation for this solution comes in the form of a cross-chain liquidity engine which will allow users to fluidly move their assets across chains with ease. An ecosystem with several simultaneously thriving chains requires a scalable liquidity protocol that enables a fluid experience across all blockchains. Let’s take a moment to understand how solutions to this problem have evolved.

The cross-chain solutions were first conceived with atomic swaps, a concept for swapping various crypto assets, back in 2013. The first implementation, however, took place much later in 2017. We discussed in a previous article how atomic swaps were not an adequate solution, which should not be much of a surprise, as they are hardly used today as it is.

The bridges were the next-generation approach to the interoperability problem, and they are thriving in today’s ecosystems. While some are more decentralized than others, bridges have found their place in the market as the best possible method for transferring liquidity so far. Some reasons for this are that they are simpler than atomic swaps, and also lack KYC implementation.

Obviously, the bridges don’t come without shortcomings, which are significant enough to be potentially long-term roadblocks. Some examples are scattered liquidity, single points of failure, and poor UX, and need to be eliminated to usher in a true multichain paradigm.

Essentially, three main challenges need to be solved to build an optimal cross-chain engine. Scattered liquidity creates inefficient markets, and there has yet to be a solution for it. And while bridges offer a much more compelling experience than atomic swaps, they can still be challenging for end-users.

Challenge 1: User Experience

A really good user experience is crucial to building a vital product. Ideally, the user should be able to interact with a product without knowing or needing to figure out, what is going on underneath the hood, which is the Apple-like approach: if the product needs a manual, it’s broken by design.

We see the multichain ecosystem thriving with users who are swapping tokens without even knowing which blockchain they are using because the product they are using is so easy to understand. Certain chains have created a pleasantly surprising UI that is easy to understand for beginners, while others sacrificed user experience and simplicity.

Challenge 2: Liquidity scaling

Liquidity is the most important component, and also the biggest challenge, for any cross-chain solution. As discussed earlier, bridges scatter liquidity, which creates inefficient markets and unpleasant experiences for users. It can become extremely cumbersome to manage several wrapped tokens that need to be created to bridge assets.

The bridges often create their own wrapped assets to move funds over, which can leave users with a wrapped token that does not have adequate liquidity to trade. A user could bridge over funds and receive USDTY, for example, while trying to originally swap USDTX for some asset, and get confused why they don’t have USDTX to start with. Pretty challenging!

As for atomic swaps, users are not only limited between the pair of assets they are trying to swap, but they must find a counterparty willing to exchange the exact amount of tokens, otherwise, the swap will not go through. This process is not scalable to millions of entry-level users, let alone thousands of power users.

Challenge 3: Pegging mechanism

While scaling liquidity is crucial to creating an efficient ecosystem, another major roadblock exists for decentralized bridges in the form of scaling pegging mechanisms.

The pegging mechanism can be the toughest to scale, so most have trusted setups. Obviously, this is the fastest option, but since we want to move to a decentralized one, we have to deal with another problem: how do you prevent relayers from stealing all of the liquidity?

The typical approach is to calculate the overall liquidity and secure it with 2X its value through staking. This, however, creates some problems. You need to minimize the liquidity in a system while maximizing the amount staked. In bridges or solutions like THORChain, all of the wrapped assets need to be secured by a wrapped version of itself, which then also needs to be secured through staking itself. But this mechanism scatters the liquidity and creates a lot of unnecessary inefficiencies.

The Solution

Capital-efficient Liquidity Pools

At Symbiosis, we’re developing a scalable cross-chain liquidity engine.

The first conceptual novelty we make use of is capital-efficient liquidity pools. Essentially they are two AMM pools consisting of two stable coins, each native to its own chain. For example, to create a сapital-efficient pool for BSC and ETH, we need to have a pair of the most liquid stablecoins from both networks (i.e. BUSD/USDC).

Why Such a Design?

The design of the Symbiosis network differs from the conventional AMM model because it doesn’t make sense to compete with every other AMM on every connected chain for liquidity pairs. After all, there’s no practical need to do it.

Our goal is to facilitate the easiest transfer of liquidity between chain A to chain B for users. The most efficient way to do this is through the setup described above because these two pools are historically the most liquid markets on native chains. And the best thing here is that there is no price slippage.

By eliminating the need to pair each token with another token, or use an intermediary token in every pairing, like THORChain, we are able to build a truly scalable liquidity engine.

So if stable coins and native asset pools allow us to facilitate liquidity transfer most efficiently, how is it possible to achieve it but literally for any token?

This is where cross-chain routing comes in.

Cross-Chain Routing

Essentially, when a swap is conducted, the transaction will be routed through an aggregator, and then routed through a stablecoin or native asset pool (depending on which route is most efficient). If you’re familiar with what 1inch does, you should be getting the idea.

For example, when a user wants to swap token A on chain X to token B on chain Y, Symbiosis goes through every aggregator and figures out if the most efficient swap is between token A and a stable coin, or between a native asset. This is how we achieve any token swaps.

Proof of Bond

Before getting into why our liquidity engine is actually scalable, we need to define what is a scaling pegging mechanism, and why we’re building something that fits this criterion.

As we discussed in the previous article, if you move away from a trustless setup and proceed with MPCs or one with relayers, you’ll need a crypto-economic mechanism that will secure the entire network. There are several ways to label these, such as proof of stake, proof of assets, proof of bond, etc., but they all share the same general idea; locking assets to align incentives of the network. So if you have liquidity in a network, the mechanisms should require that relayers stake/bond a comparable liquidity TVL in the system. This will align their incentives with that of the whole system, making any sort of attack unfavorable, as the losses incurred would exceed any kind of financial gain.

Final Thoughts

Symbiosis aims at solving the twofold problem: liquidity fragmentation across different blockchain networks, and poor user experience while working with the DeFi and Web3 economy. Symbiosis simplifies the time-consuming process of finding a suitable cross-chain bridge so you can get the tokens you need. With a single click, one can get token swaps done — regardless of the network, they’re on.

Website: https://symbiosis.finance

Twitter: https://twitter.com/symbiosis_fi

Telegram: https://t.me/symbiosis_finance

Discord: https://discord.gg/symbiosis