7 O’Clock Capital: Understanding the Prosperity and Sustainability of the Cross-Chain Track in One Article

Author: 7 O'Clock Capital

Preface

The core spirit of the Internet lies in: equality, openness, sharing, interaction, and innovation. This is the essence of Internet technology and the charm of the knowledge economy of this era. The early builders of the Internet adhered to this spirit, creating the Web 1.0 era.

As time has passed, with the rise of Web 2.0 and the mobile Internet, nearly a billion users have entered the Internet. However, the leading companies in the Internet are weaving increasingly large and closed information cocoons, and some emerging products are merely continuing to draw circles. Openness and interaction depend more on the interests of the oligarchs.

Now, with the arrival of the Web 3.0 era, decentralized and distributed technologies have made information and data completely transparent and public. Although different public chains have completely independent technical layers due to different code sets, the spirit of the Internet has led more and more Web 3.0 developers to solve this problem through technology.

Cross-chain has emerged as a "bridge" in the Web 3.0 world, providing great convenience for the secure interconnection and sharing of data and assets. At the same time, the application of cross-chain technology has made the ecosystems of major public chains more decentralized.

I. Background and Current Status of Cross-Chain

With the development of blockchain technology, a state of multi-chain coexistence has emerged.

Despite the continuous emergence of new public chains, Ethereum remains the first choice for most DeFi projects, mainly due to the high liquidity and trading volume of the network. It can also be seen that in the current DeFi era where "liquidity is king," public chains are using high APY to attract users. According to statistics from DeFi Llama, there are currently over 110 Layer 1 public chains in the market, with a TVL of $34.4 billion for DeFi on Ethereum. Other public chains include BSC at $4.9 billion, Solana at $1.9 billion, Avalanche at $2.3 billion, TRON at $4 billion, and Polygon at $1.5 billion. The TVL of Layer 2 has grown from $480 million in June 2021 to $5 billion in June 2022, an increase of 10.4 times. With the launch of the Optimism Token incentive program and the continuous improvement of the Arbitrum, Zksync, and StarkNet ecosystems, the TVL of Layer 2 will continue to increase.

For some non-EVM public chains, interoperability between assets is very important, and the lack of interoperability between multiple public chains has led to sluggish liquidity. Therefore, cross-chain bridges are essential for the crypto market. From the perspective of the cross-chain bridge market, there are at least 100+ cross-chain bridge projects.

The current core of cross-chain in the market includes Cosmos's IBC modular ecosystem for internal cross-chain, Polkadot's cross-chain behavior completed by relayers, and cross-chain bridge applications based on different public chains and asset transactions. The problems solved by cross-chain bridges mainly focus on asset cross-chain, but the transmission between blockchains includes not only assets but also contract calls, cross-chain transactions, and the data and state interactions of smart contracts. As the underlying infrastructure for achieving information interoperability between blockchains, cross-chain has also become a hot product.

II. What is Cross-Chain

Cross-chain refers to the use of certain technologies to allow value to flow directly across the barriers between chains, which can also be understood as achieving value exchange between different blockchain systems, transmitting data and information between two or more blockchains. It is most commonly used to exchange assets from one blockchain ("source" chain) to another ("target" chain).

The core mechanisms of cross-chain are: monitoring, relayers, consensus mechanisms, signatures, security, speed, scalability, convenience, and caching.

1. Monitoring - Responsible for monitoring the state of the source chain through oracles, relayers, or validators.

2. Relayer - After receiving information, the monitoring role transmits the information from the source chain to the target chain.

3. Consensus Mechanism - Participants or validators monitoring the source chain need to reach a consensus and pass the information to the target chain.

4. Signature - Participants are required to sign the information sent to the target chain, which can be done with single or multi-signatures.

5. Security - Trust and activity levels serve as risk control against malicious actors, ensuring the safety of user funds.

6. Speed - The latency and finality of completing transactions need to balance speed and security.

7. Scalability - Multi-chain deployment is compatible with various asset transactions and transfers, while allowing users and developers to choose target chains and integrate additional target chains.

8. Convenience - Compatible with handling transactions and compiling files, providing users with a more friendly and simplified front end through automated processes.

9. Caching - When uploading in batches, it allows users to upload files to the storage network, facilitating quick access to files, reducing hops between chains, and improving efficiency.

III. Different Perspectives on Cross-Chain Classification

(I) Classification Based on Cross-Chain Behavior

1. Cross-Chain Behavior of Transactions

(1) Token Trading

Using hash time lock methods, technology can directly exchange native tokens across various public chains on-chain to achieve transactions.

(2) Token Transfer

Public chains are closed, and native assets on one chain cannot be directly transferred to another chain. With cross-chain bridge technology, users lock native assets on the source chain and issue an equivalent mapped asset on the target chain to achieve token transfer.

2. Cross-Chain Behavior of Messages

The essence of cross-chain behavior is a combination of a series of message transmissions. Information is transmitted across chains, such as Chain A reading the state and information of Chain B, using the state and information of Chain B as trigger conditions for execution. Therefore, two operations are required: while locking on Chain A, information about the lock is transmitted to Chain B, which verifies the authenticity of the message and mints the mapped token, then feeds this state information back to Chain A.

This allows for cross-chain lending, cross-chain NFTs, cross-chain aggregation, cross-chain governance, cross-chain derivatives, and other combinations.

(II) Classification Based on Bridge Types

1. Specific Assets

Accessing specific assets from external chains, with assets being wrapped assets fully collateralized by underlying assets in either custodial or non-custodial ways. BTC is the most common asset bridged to other chains, such as xBTC, with various different bridges existing only on Ethereum. This type of cross-chain bridge is relatively easy to implement, has strong liquidity, but limited functionality, requiring redeployment on each destination chain.

2. Specific Chains

Cross-chain bridges between two specific chains operate by locking and unlocking tokens on the source chain and minting wrapped assets on the target chain. The complexity of this type of cross-chain bridge is limited, allowing for faster market deployment, but it is not easy to scale to a broader ecosystem.

3. Specific Applications

Applications that access multiple blockchains, intended for use within a single application. The application itself benefits from a smaller codebase, not having a complete application on every blockchain, but having lighter modular adapters on each blockchain. Blockchains deploying adapters can access all other blockchains connected to the application, but expanding functionality is relatively difficult.

4. General Type

Providing information transmission between chains. DApps can use this bridge to achieve cross-chain communication, such as calling smart contracts on another chain. Based on this cross-chain communication protocol, developers can enhance user experience in multi-chain scenarios.

(III) Classification Based on Bridge Connection Objects

1. L1 - L1 Bridge: Can connect two different L1 chains and transfer assets.

2. L1/L2 - L2 Bridge: Can connect L1 blocks with L2 networks or two different L2 networks to facilitate transactions.

(IV) Classification Based on Security

1. Trustless

The security of a cross-chain bridge is the same as that of the underlying blockchain it bridges. In fact, most are not trustless; the system has security in its economic and cryptographic components.

2. Insurance

Malicious actors can steal user funds, and if errors or misconduct occur, they need to provide collateral and be fined. If user funds are lost, they will be compensated through the confiscation of part of the collateral.

3. Binding

Similar to the insurance model, but users will not recover funds in the event of errors or misconduct, as the fined collateral may be destroyed. The type of collateral is crucial for the insurance model; endogenous collateral carries greater risk, and if a cross-chain bridge fails, the value of the token may collapse, further reducing the security guarantees of the cross-chain bridge.

4. Trust

Validators do not provide collateral, and users will not recover funds in the event of system failures or malicious activities; core users mainly rely on the reputation of the cross-chain bridge operators.

(V) Classification Based on Validation

1. External Validation

Through single-node or multi-node validation, the core involves sending, locking, validating, reaching consensus, minting, and other elements. This method also improves transaction speed, reduces gas fees, and allows the transmission of generic data and interaction with any number of target chains, making it easier to connect with more chains. However, its security is relatively poor, requiring users to trust external validators. This solution requires validators to over-collateralize to ensure that collateral assets > validation amounts, enhancing security as overall liquidity increases and throughput grows.

2. Native Validation

The core can be understood as relying on nodes and miners on the source chain for validation, eliminating third-party validators. In this method, the data transmitted between chains is entirely validated by the validators of the underlying chain, without the need for collateral, improving the trustless form. However, this also affects scalability, reduces validation speed, and increases gas fees.

3. Local Validation

Using a liquidity network model, it employs local validation without requiring global validation to maintain faster speed and lower costs, and it is trustless, relying on support from the underlying chain for security. However, it has limitations in information transmission and cannot achieve generalized information transmission.

IV. Subdivided Tracks of the Cross-Chain Ecosystem

Based on the above research on the cross-chain track, 7 O'Clock Capital believes that the cross-chain track is still in its early stages, with security, scalability, and other aspects not truly realized, remaining in a void state. This has led to incidents where some cross-chain projects have been attacked and lost assets. However, continuously improving cross-chain technology can truly enable infinite connections between blockchains. Based on our understanding, we have subdivided this track into original cross-chain bridges based on public chains, cross-chain bridges that diversify asset interconnectivity based on transactions, third-party cross-chain bridges, and aggregator-type cross-chain bridges.

(I) Public Chain Bridges

Public chain bridges refer to cross-chain application products developed by public chains themselves to increase ecological liquidity, such as NEAR's Rainbow Bridge and Solana's Wormhole.

1. Wormhole
It is an asset cross-chain tool developed in collaboration between Solana and Certus.One, launched on August 10, 2021, mainly used to achieve cross-chain between Ethereum and Solana assets. With the launch of version V2, Wormhole added support for asset transfer functions on BSC, Avalanche, Fantom, Polygon, Oasis, Karura, Celo, and other chains. It also supports cross-chain transfer of NFT assets ERC-1155 and ERC-721.

Cross-Chain Mechanism

It works through two smart contracts—one on Solana and one on Ethereum. The Ethereum token is locked in a contract on one blockchain, and then a parallel token is issued on the other side of the bridge. The parallel token is pegged to the value of the original token and can interoperate with other blockchains.

2. Rainbow Bridge

A cross-chain bridge officially launched by Near, mainly used to connect assets on the Ethereum chain. When users cross-chain their assets, they need to switch their wallet to the target network, generally only supporting connections to the same wallet address. However, in Rainbow Bridge, users only need to log in with their Near account, fill in the on-chain wallet address and amount they wish to transfer in or out, and the system will execute the operation automatically.

Operation Mechanism

It tracks the state of a given blockchain and validates it in a trustless manner without requiring extensive computation. For example, Ethereum smart contracts on the NEAR chain can track the state of the Ethereum chain within NEAR smart contracts, allowing NEAR applications to access and validate Ethereum states and read data information, such as contract balances and transaction histories. Currently supports ETH, Aurora, NEAR.

3. Avalanche Bridge

It is the official cross-chain tool launched by Avalanche in July 2021, replacing the previous Avalanche-Ethereum Bridge (AEB). It mainly addresses the issue of transferring assets under the ERC-20 standard on the Ethereum chain to Avalanche network assets. In the Avalanche ecosystem, Ethereum ERC-20 assets that cross-chain via the AB bridge are marked with the suffix ".e," for example, WETH.e represents WETH cross-chained to the Avalanche network.

Core Technology

Its core technology is Intel SGX, which Intel launched as an instruction set extension to ensure hardware security, not relying on the security state of firmware and software, providing user space trustworthiness, a new set of instruction set extensions, and access control mechanisms to achieve isolation between different programs, ensuring the confidentiality and integrity of user-critical code and data against malicious software. Unlike other security technologies, SGX's trusted computing includes only hardware, avoiding the flaws of software-based TCBs that have software security vulnerabilities and threats, enhancing system security guarantees. SGX can ensure a trusted execution environment at runtime, preventing malicious code from accessing and tampering with the protected content of other programs during execution, further enhancing system security.

(II) Asset Trading Bridges

Asset trading bridges refer to wrapping cross-chain based on mainstream assets (BTC), focusing on providing greater circulation and stability of mainstream assets.

1. Keep Network

Establishes a bridge between public chains and private data without compromising reliability or transparency.

The main focus is on BTC asset cross-chain. tBTC is a cross-chain project of decentralized relaying solutions. In terms of security, tBTC has three guarantees:

1. Threshold EC-DSA signature encryption; (Threshold EC-DSA signature: a distributed multi-party signature protocol)

2. Random beacon;

3. Signers need to over-collateralize ETH, increasing the economic cost of malicious behavior.

Its security technology is among the industry leaders in the entire BTC asset cross-chain, but it requires 450% over-collateralization, performing poorly in capital efficiency. However, the team has included this as an improvement point in the subsequent tBTC v2 version.

2. pNetwork

A fully decentralized and open system that connects various blockchains, providing the freedom of movement for crypto liquidity.

Core Mechanism

It mainly utilizes TEE and MPC to support cross-chain functionality, allowing the issuance of cross-chain composable or pToken assets using trusted execution environments (TEEs) and MPC-supported networks to protect underlying assets. pBTC is a BTC-pegged asset issued by pTokens, representing a decentralized witness cross-chain solution. pBTC uses trusted computing to ensure security, with BTC addresses managed by a group of validators running trusted execution environments, and also employs a threshold signature scheme for coordination. Currently supports usage on Ethereum, BSC, Polygon, xDAI, Arbitrum, Telos, and other chains.

Its V2 version is a cross-chain routing protocol that introduces a universal messaging system called Postman for cross-chain data transmission, allowing users and smart contracts on any blockchain platform to send and receive assets and data across chains, improving and expanding the applicability of the previous version.

3. WBTC

WBTC was jointly initiated by Kyber, Ren (Republic Protocol), and BitGo, with Kyber and Ren exchanging the initial amount of tokens through custodial Bitcoin to provide initial liquidity and enable immediate swaps with users.

Core Mechanism

WBTC compensates for centralization issues through Chainlink's proof of reserves mechanism. DApps on Ethereum can connect to the proof of reserves contract, which is checked every 10 minutes by Chainlink's oracle network against the balance of BitGo's WBTC custodial wallet. When deviations exceed defined thresholds, Chainlink will use the new balance and push data on-chain.

Core Roles

Custodian: The institution holding the assets.

Merchant: The minting and burning institution or trading party of WBTC tokens.

User: The holder of WBTC tokens.

DAO: Contract updates, additions, and removals of custodians and merchants are controlled by multi-signature contracts.

Regulatory Body: WBTC's smart contracts are overseen by several trusted third-party auditing firms, including Solidified, Technologies, ChainSecurity, and Coinspect.

(III) Third-Party Bridges

Third-party bridges refer to individual cross-chain application products that provide interoperability for users from different perspectives of security, scalability, efficiency, and low cost.

1. Multichain

Mainly targeting cross-chain between platforms supporting the Ethereum Virtual Machine, established on July 20, 2020, it is a multi-chain platform co-developed by the Anyswap team and Andre Cronje, the founder of yearn.finance (YFI). The base chain is Celo, and it currently supports the transfer of over 2000 assets across multiple blockchains, including Fantom, Ethereum, BSC, Polygon, Avalanche, Moonriver, Harmony, Arbitrum, and more.

Core Advantages

Supports developers to deploy cross-chain tokens independently, with broad compatibility, which is the main reason why Multichain.xyz can support so many public chains and cross-chain assets. However, Multichain.xyz's cross-chain solutions typically cannot independently form universal assets on the target chain.

Core Mechanism

Router: Anyswap's latest non-custodial cross-chain solution that enables token exchanges between chains.

Bridge: A custodial mapping solution that allows tokens to be exchanged between chains.

Anyswap Working Nodes: Users can stake any token by delegating or running their own nodes.

2. Hop Protocol

Hop Protocol is a cross-chain bridge developed by the smart contract wallet development team Authereum, launched in July 2021. The solution designs a universal asset bridge for Rollup-to-Rollup to facilitate asset transfers between Layer 2 networks and the Ethereum mainnet.

Core Mechanism

Hop Protocol consists of two core components: the automated market maker (AMM) component and the connector (Bonder).

When using Hop, assets need to flow through Hop into the Layer 2 network; for example, ETH entering Layer 2 via Hop's asset bridge is referred to as Hop ETH (or hETH). hETH and ETH are theoretically equivalent, but liquidity instability can create price discrepancies, so AMM components and connectors are introduced.

AMM is designed to address short-term price discrepancies between ETH and hETH, while the connector provides liquidity for users needing to release liquidity in advance, helping users convert hETH back to ETH while also earning part of the yield (7-day withdrawal time). It has been launched on Polygon, xDai, Optimism, Arbitrum, and ETH, Gnosis mainnets.

Core Functions

1. Cross-Chain: Supports asset cross-chain between Ethereum mainnet, Polygon network, Arbitrum, Optimism, and xDai (DAI, USDT, USDC, MATIC, ETH).

2. Liquidity Pools: Provides liquidity for native assets on the above networks and their corresponding h-assets.

3. Token Conversion: Back-and-forth conversion between tokens and h-tokens.

4. Staking Liquidity: Staking provided liquidity tokens (LP) to earn yields, currently supporting assets like Polygon and Gnosis.

3. Class ZZ

Class ZZ is a public chain that supports decentralized cross-chain trading, achieving cross-chain transactions through a native token cross-chain protocol (Te Waka). The Te Waka protocol is fully open-source and decentralized, allowing tokens to switch freely on any mainnet supported by the protocol.

Core Functions

The core function is cross-chain trading. By employing techniques from elliptic curve algorithms, it supports cross-chain transactions, achieving trading from external chain assets to CZZ; and through staking, it enables trading from CZZ to external chain assets.

1. Cross-chain trading, achieving BTC/USDT, DOGE/LTC transactions in a decentralized manner.

2. An original protocol for special consensus addresses and on-chain public asset management.

3. Quick payments, an original capsule protocol that can achieve second-level payment confirmations in a 5G environment.

4. Utilizing 5G networks to solve the impossible triangle, achieving EOS-level TPS without sacrificing decentralization.

5. Post-quantum addresses, expanding addresses for elliptic curve encrypted addresses, with new addresses using post-quantum signatures.

(IV) Aggregators

Aggregators refer to a derivative of multiple chains and scalability for cross-chain, providing comprehensive asset interoperability while presenting users with optimal cross-chain solutions.

1. O3 Swap

A cross-chain aggregation trading protocol incubated by the O3 Labs team, currently supporting cross-chain interactions with Ethereum, BSC, Polygon, Arbitrum, Heco, Neo, OKX, and Avalanche, totaling 8 chains. By deploying a "aggregator + asset cross-chain pool" model across different public chains and Layer 2 networks, it enables the free exchange of mainstream assets across different chains. Investors include NGC Ventures, OKEx Blockdream Ventures, 7 O'Clock Capital, SevenX Ventures, FBG Ventures, and others.

Core Functions

The main functional modules of O3 Swap consist of two parts:

O3 Aggregator (Trading Aggregator) - An aggregator deployed across various mainstream networks, helping users find the best prices and most effective trading paths;

O3 Hub (Cross-Chain Trading Pool) - The hub for cross-chain trading, aggregating mainstream assets from various public chains and Layer 2 networks into the Cross-chain Pool through the cross-chain protocol Poly Network, creating a cross-chain asset trading pool to help users achieve cross-chain trading of assets across different chains.

2. XY Finance

This protocol is a cross-chain trading aggregation protocol incubated by the Taiwanese crypto startup Steaker, established in 2021, aimed at solving liquidity barriers in multi-chain ecosystems, allowing crypto assets to be more conveniently and quickly converted between various ecosystems.

XY Finance is mainly divided into two solutions: "X" and "Y":

X---refers to X Swap, which allows cross-chain trading and is a cross-chain aggregation trading platform integrating various cross-chain bridges and DEXs.

Y---refers to Y Pool, a cross-chain bridge built on multi-chain liquidity pools.

3. Socket

Socket unifies the multi-chain ecosystem by connecting all chains and enabling seamless bidirectional transmission of assets and information. It aggregates Bungee (formerly Fundmovr), Zapper, Zerion, Ambire Wallet, Orange Wallet, Atlantis Loans, OnDefy, Tetu, Mushroom Finance, and others.

Operation Method

Socket interoperability consists of a liquidity layer and a data layer. The liquidity layer aggregates all asset bridges into a single collection bridge for efficient cross-chain asset transfers, dynamically selecting the best bridging/routing and optimizing for developers' preferences. Currently supports chains such as Arbitrum, Avalanche, BSC, Ethereum, Fantom, Optimism, Polygon, xDAI, Aurora, and others.

V. Future Prospects of Cross-Chain

According to Vitalik Buterin's post on Reddit, he is optimistic about the future of multi-chain but pessimistic about cross-chain. Some believe that without bridges, there would be no diverse development in the crypto world, but the emergence of bridges has also led to centralization and vulnerabilities.

As more public chains emerge, the implementation path of cross-chain, in addition to the free flow of assets across chains, also needs to provide possibilities for information cross-chain transmission and interoperability between DApps. For example, many DeFi projects in the market not only require interoperability between assets but also need to achieve the transmission of information and data alongside asset cross-chain. Therefore, the main body of cross-chain can derive cross-chain information transmission interoperability between different DApps to achieve more interactions.

In summary, in a multi-chain ecosystem without interoperability, asset transfers between chains can only rely on centralized trading platforms, while the principle of decentralization makes cross-chain an indispensable part. In the fragmented consensus system of the multi-chain era, cross-chain bridges are undoubtedly a necessity. In the history of the development of the Internet and blockchain, technologies that possess composability, low cost, security, and convenience are one of the paths to success.

VI. Conclusion

The potential problems in the current cross-chain track still need to be explored and improved. Whether in the future, cross-chain behaviors can be more conveniently applied to various products while ensuring security, scalability, and low costs, forming a perfect interoperability in the blockchain world, is an industry expectation and an opportunity for assets to achieve comprehensive circulation.

In this regard, we believe that with the continuous iteration and development of the market, we will continue to welcome a new era of chains, thereby forming a more prosperous new pattern in the crypto industry!