HOW TO ACHIEVE DEFI CROSS-CHAIN INTEROPERABILITY WITH RAINBOW NETWORK

HOW TO ACHIEVE DEFI CROSS-CHAIN INTEROPERABILITY WITH RAINBOW NETWORK

The emergence of DeFi has proven that the vision for financial services to function without central intermediaries is possible. Since the emergence of bitcoin in 2009, several innovations have broadened the scope of enjoying a decentralised financial future - AMMs, no-loss lotteries, yield farming, staking, decentralised insurance, etc.

However, even with such innovations, DeFi has to overcome many challenges before it can reach the status of a standard financial system for the world. These challenges include low liquidity spread, scalability, poor accessibility, low adoption, and poor interoperability.

It's important to note that most of these problems would be fairly easy to address with a solution that can help DeFi protocols become effectively interoperable. As a result, many consider cross-chain interoperability as the holy grail of DeFi, allowing individuals to transfer value across several uncorrelated blockchain networks.

THE PROBLEM WITH DEFI INTEROPERABILITY

One of the perks of traditional banking is the integrations and infrastructures that enable individuals to transact seamlessly across different financial platforms and technologies. You could easily interchange assets across various financial institutions without encountering many difficulties. This is possible because of the centralized intermediaries connecting banking institutions, Fin-techs, trading platforms, etc.

However, these intermediaries are responsible for the problems that make traditional finance unattractive. Hence, DeFi seeks to replace financial intermediaries through its basket of innovations with blockchain networks as the foundation infrastructure.

While DeFi has eye-catching value propositions and innovations, they all exist in silos, unlike traditional centralized finance. This is due to the inability of their underlying blockchain networks to interact with each other.

Although blockchain networks are all structured with the same logic and similar technological frameworks, they do not have the ability to communicate with each other. The complexity is such that even a forked chain won't be able to interoperate with its original chain.

The main reason for this interoperability problem is because blockchains maintain different distributed ledgers, and making them interact would require an agreement on a single state which is practically impossible. As a result, the growth of DeFi has been somewhat stunted and limited:

  • The rich liquidity of the Bitcoin and Ethereum ecosystem is limited to just their blockchain networks.

  • Limits economic activities to certain blockchain networks, especially those with first mover advantage.

  • Bitcoin holders can't enjoy smart contracts with their tokens as bitcoin doesn't support the development of dapps.

  • DeFi platforms in newer blockchains have to build their own liquidity from the ground up.

  • Building in less popular blockchains automatically means having a smaller customer base.

  • Users find it difficult to move assets to other chains when their current blockchain experience challenges like higher fees or low throughput.

  • Slow adoption rate as newer DeFi platforms are scattered across a wide range of blockchain networks.

However, when there's interoperability, shared information and value will enable the different blockchain networks to make up for the limitations/shortcomings of one another and, consequently, cancel out the challenges above.

EXPLORING DEFI CROSS-CHAIN INTEROPERABILITY

Cross-chain interoperability allows for the transfer of value and data across two or more separate blockchain networks that were once uncorrelated. This means that protocols and individuals could seamlessly communicate and move assets across several blockchain networks. This is in contrast to multi-chain, which means the ability of a project to operate/run on different blockchain networks.

Before the invention of cross-chain interoperability protocols, people could only use cross-chain functionalities through centralised exchanges, which operate with an opposite ethos from DeFi's decentralisation. You would have to surrender to a central authority and risk issues that arise from central points of failure. Additionally, CeFi platforms require identity verification from their users, meaning you would also have to sacrifice your privacy and place trust in central authorities not to share your personal information with third parties. But as you should already know, centralised platforms always compromise this trust.

To avoid such compromise and maintain decentralisation, DeFi protocols have remained limited to the original blockchain on which they launched. In turn, they've also shared the limitations of these blockchains. Ethereum protocols have to compromise low transaction fees and high transaction speed for the comfort of its high liquidity and security. On the other hand, protocols in emerging blockchain networks have to compromise the latter for the former. This also limited traditional investors from entering the DeFi space as they are used to enjoying an integrated experience of both high liquidity and transaction speed in CeFi.

However, cross-chain interoperability solutions have changed the narrative and bridged the gap across popular blockchain networks, allowing several DeFi protocols to share value across different blockchain networks. You could use the native tokens of a protocol in Blockchain A to access DeFi services in another protocol in Blockchain B. This includes atomic swaps, cross-chain yield farming, staking, borrowing/lending, no-loss lotteries, etc. Generally, cross-chain interoperability helps:

  • Lower the barrier of entry for investors, traditional ones especially. This, in turn, attracts more liquidity into the DeFi ecosystem.

  • Spread liquidity across blockchain networks instead of having so much concentrated on one platform.

  • Improves scalability by spreading transaction workload across blockchain networks, which in turn boosts transaction speed and reduces gas fees.

  • Transform DeFi into a hybrid sector where developers can leverage several innovative solutions across different blockchain networks to birth new kinds of solutions.

While these benefits seem eye-catching at the surface level, significantly transforming DeFi, several issues plague the current process of achieving cross-chain interoperability.

THE PROBLEM WITH CURRENT CROSS-CHAIN INTEROPERABILITY

The prevalent standard of transferring value across blockchain networks occurs via leveraging a particular design of blockchain bridges. The process involves locking up assets in a smart contract on the source chain and minting a synthetic or wrapped version on the destination chain. Some of the most popular bridged assets include ETH to wETH, BTC to wBTC and BTC to RenBTC.

Bridges can either allow a one-way transaction system where you can only mint on the destination chain or a back/forth transaction system where you can mint and transfer assets across two or more networks. Some bridges are token-specific, while others are multi-chain, enabling the transfer of several assets, fungible and non-fungible tokens alike.

However, most blockchain bridges have become the target of malicious entities as their design introduces a perpetual risk that hackers find attractive. Hackers can compromise the smart contracts that hold native assets on the source chain and drain its liquidity. Hence, leaving users holding the wrapped asset stranded with a worthless token as they can't swap them back for the original asset.

Such hacks are becoming regular among blockchain bridges. A report by Chainalysis reveals that 69% of all stolen funds in the crypto market stem from hacks in cross-chain protocols.

In March 2022, a malicious entity compromised the Ronin bridge of Axie Infinity and made away with over $622 million worth of ETH and USDC.

In February, hackers compromised Wormhole, a bridge between Ethereum and Solana, in an exploit where they stole over $320 million worth of wrapped ether (wETH).

The recently launched Nomad Bridge also had its fair share of attacks when an attacker(s) moved over $190 million out of its bridge.

Ethereum's co-founder, Vitalik Buterin, has also expressed concerns over a possibility where attackers can use 51% attacks to target cross-chain bridges. The process involves tricking cross-chain liquidity protocols by reverting transactions on the source blockchain network after depositing assets on the bridge's liquidity pool.

A common factor among these cross-chain bridges is that they all aim to solve the issue of cross-chain interoperability by running third-party protocols on top of different blockchain protocols. This gap needs an innovative approach, maybe one where a layer1 network launches with cross-chain functionalities integrated into its core blockchain framework from the beginning. And this is precisely how the Rainbow Network approaches cross-chain DeFi interoperability.

INTRODUCING RAINBOW NETWORK - SECURELY UNIFYING CROSS-CHAIN LIQUIDITY ACROSS DEFI PLATFORMS

Rainbow is a layer one cross-chain DeFi network on Cosmos that serves as a hub for capital-efficient cross-chain investments and liquidity access across multiple blockchain networks.

Through Tendermint BFT, Cosmos SDK and the Glitter App, among other solutions, Rainbow ensures high liquidity, instant finality, and interoperability with several established layer one networks.

One key area that sets Rainbow apart is the integration of unified liquidity into its network from the very beginning via the highly interoperable Glitter Bridge. As a result, users can easily interact and invest across multiple DeFi protocols without migrating their assets.

In addition, Rainbow is developing a user-friendly mobile application coupled with on/off ramps, hence, allowing liquidity to flow into its ecosystem through multiple entry points. Moreso, Rainbow plans to implement AI and machine learning to optimize its cross-chain liquidity and improve the overall experience for users.

On the side of developers, they can quickly scale new projects via the inherent interoperability of the Rainbow technology. The technology is designed such that projects automatically list on all other blockchain platforms supported by Rainbow when they list their tokens on the Rainbow Network.

The innovative approach of the Rainbow Network is owing to its founding team's experience from building the Glitter Finance bridge, which has undergone four audits and inspections from reputable firms, including Certik and the Algorand Foundation.

Some of the innovative cross-chain DeFi services on Rainbow include:

  • Cross-chain Swapping: Native and Wrapped assets
  • Cross-chain Farming
  • Cross-chain Liquidity provision
  • Cross-chain Staking
  • Cross-chain Lending/Borrowing
  • Cross-chain Launchpad
  • Cross-chain DEX
  • Yield Optimisation‍

Rainbow Network is your one-stop platform in the search for a cross-chain, decentralised and permissionless DeFi platform that simplifies investment protocols and processes.

© Rainbow Network 2024