Blockchain and Interoperability: Globalization 3.0

By akohad Oct10,2022


Co-authored with the Spartan Labs Research team.

The crypto space is constantly searching for the next narrative after L1s, L2s, and NFTs. We think interoperability stands out as the next most probable dominant narrative, as it brings currently segregated blockchain ecosystems together, just like how globalization forged the world economy into one.

Before globalization, the production and sale of goods occurred through localized supply chains. Such a model meant there were high levels of duplication and inefficiency. Through the introduction of comparative advantage and international trade, globalization made decentralized, non-localized supply chains possible, eliminating much of this inefficiency. Today, products like Boeing’s jets can comprise parts manufactured by product specialists across 58 non-US locations.

The crypto universe resembles the world economy before globalization. Ecosystems (countries) are segregated, each trying to excel at every single element of the economy’s value chain (different DEXs, money markets, aggregators, etc.). Interoperability is the critical ingredient required to allow blockchains to communicate: similar to how countries open their borders, both physically and virtually, to allow the free exchange of information and capital. We posit that new advances and technology focused on Web3 interoperability can usher in its own “Globalization 3.0” and ignite the next wave of growth.

In this article, we will discuss why we need interoperability and how to evaluate interoperability, take a closer look at existing and upcoming solutions, and wrap up with our view of a truly interoperable future.

The blockchain universe is at a crossroad — it has gained significant adoption but lacks a catalyst for mass adoption. We think the answer to this question, on a fundamental level, is interoperability. A utopian vision of blockchain’s future contains the ability for digital assets and information to flow among specialized ecosystems frictionlessly, without creating redundant data or demanding new intermediaries. In our opinion, below are several main reasons why interoperability is vital to catalyzing crypto mass adoption.

Interoperability Introduces Comparative Advantage Into the Blockchain Universe

There are three overarching pillars of blockchain design: decentralization, security, and scalability. Due to conflicting engineering requirements to fulfill each pillar, existing blockchains all had to compromise on one or more pillars to excel in their chosen specialization, hence, the Blockchain Trilemma. For example, on a Proof-of-Stake (PoS) chain, one way to increase scalability is to reduce the amount of time taken to agree upon a transaction, which can be achieved by reducing the number of validators — such design would have compromised decentralization for scalability. PoS itself is a compromise of security for scalability: in the original Proof-of-Work (PoW) network, validators solve cryptographic puzzles before they can vote upon block states, while PoS validators simply need to prove their stake on the network to be able to vote.

Interoperability can potentially solve the trilemma as specialized blockchains would be able to focus on their forte rather than trying to provide full-stack service like they do now. A scalable chain with high TPS (transactions per second) but more centralized validator networks can focus on processing high-frequency tasks with fewer security implications (e.g., graphic data for on-chain gaming), while a secure chain with lower TPS can process low-frequency tasks with high-security requirements (e.g., gamers’ in-game purchases record). These only scratch the surface of endless applications that make crypto ecosystems more accessible and efficient.

Interoperability Brings Simplicity to End Users & Facilitates Mass Adoption

User experience (UX) is often regarded as the single most critical success factor for software and technology products. A smooth, intuitive user experience is essential for onboarding the next billion people online with Web3. We cannot realistically expect inexperienced users to maintain 10 different wallets and keys, each of which serves a specific purpose in their transaction needs.

Interoperability enables developers to build front-end applications with easy-to-use UIUX, which utilizes multiple specialized chains on the backend. It would be much more user-friendly if a single button click could accomplish on-ramping into a CEX, swapping for gas, withdrawing to a major chain supported by a CEX, bridging from the major chain to a new chain, and depositing capital into a new pool on the new chain.

Interoperability Makes 1+1 >2

Back to our globalization example, the value of an integrated world economy is larger than the sum of values of individual economies, ceteris paribus1. We believe interoperability can do the same to the blockchain universe in several ways.

First of all, developers would be liberated from the urge to provide full-stack services in order to attract adoption (TVL) and instead focus on building their core edge, which, collectively, leads to more efficient solutions.

Secondly, interoperable blockchains lead to interoperable data, which is a huge improvement compared to today’s siloed and hard-to-query data spread across chains. Better data availability and composability will catalyze the self-evolution of Web3 as previously untouched ideas surface from newly observable data.

We consider the Interoperability Trilemma2 a good summary of the three pillars of a truly interoperable solution: generalizability, trustlessness, and extensibility. As readers will find out in later sections, current interoperable solutions usually involve compromising one or more pillars to achieve others.

  1. Generalizability: Refers to the capability of handling complex cross-chain interactions beyond simple token transfers, such as smart contract calling and messages
  2. Trustlessness: Refers to having the equivalent security of the underlying blockchain
  3. Extensibility: Refers to how easy it is for any blockchain or application to integrate into an existing interoperability solution

The three pillars can be broken down into different properties on which developers and users evaluate the level of interoperability. Some critical properties are discussed below.

  1. Security: Who verifies the transaction and system? Does the solution inherit the underlying security mechanism of the blockchain? Does the solution require external validators? If so, are they permissioned or permissionless?
  2. Convenience: How long does it take for the transaction to be completed, and how many supporting transactions does the user have to sign to execute the entire transaction? For a developer, how long and how complex does it take to integrate an interoperability solution? Does the developer have to build extra infrastructure, or can it be “plugged and played” in an instant?
  3. Connectivity: Refers to how many different types of destination chains the solution can connect to (i.e., rollups, sidechains, layer-1s)
  4. Ability to Process Complex and Arbitrary Data: Can the solution process transfer of messages and more complex data such as smart contract calling? Or does it only support cross-chain token transfers (i.e., native bridges)
  5. Cost-Effectiveness: How much does it cost to transfer assets across chains, and how much does it cost to maintain the solution? Some solutions require additional layers of transactions which add up gas costs, while some set developers back by millions of dollars a day just to have the solution up and running.

We have discussed why we need interoperability and what properties to evaluate the level of interoperability with. The following sections will review both existing and upcoming interoperable solutions, divided into two categories: patches built on non-interoperable ecosystems and natively interoperable solutions.

Patch Solutions Built On Non-Interoperable Ecosystems

Solutions mentioned in this section are what we call “patches” because they are built post-mortem on top of non-interoperable chains in attempts to add on some interoperable properties.

Centralized Exchanges (CEXs)

CEXs enable users to move tokens between chains, much like banks have done to promote the transfer of value between otherwise isolated sovereign economies. While CEXs are among the most user-friendly and cost-effective means for users to transfer assets across chains, they have significant drawbacks.

Above all, most CEXs require KYC (know your customer) before allowing withdrawals, adding an extra layer of complexity to the average user. Second, CEXs onboard tokens and chains according to their own agenda, which puts user access to their assets under arbitrary control — for instance, top exchanges halted withdrawal/deposit to/from LUNA chain during LUNA-UST implosion. Degens who bridge onto new chains shortly after chain genesis also find CEXs insufficient as small chains with lower TVLs usually will not be onboarded until later, if onboarded at all. Most critically, smart contracts are also not composable via CEXs, leaving the exchanges merely capable of facilitating transfers of tokens but not arbitrary data.

CEXs also represent counterparty and credit risks to users. Since CEX regulation is still nascent, users usually lose all of their assets and find little legal recourse when reckless operation bankrupts exchanges.

Burning Bridges

Cross-chain asset bridges are the most widely used patch solution to interoperability. These bridges allow users to transfer their assets from a source chain to a destination chain. Bridges are powered by a system that goes through locking, minting, burning, and redeeming. On both chains, smart contracts will be deployed to lock native assets on the source chain and issue “wrapped” assets on credit on the destination chain.

For instance, Bob locks 10 ETH on Ethereum and mints 10 wrapped-ETH (wETH) on Solana via a bridge. In principle, the 10 wETH minted by Bob on Solana are backed 1:1 by the 10 ETH locked on the Ethereum chain. Bob can do the opposite by first burning 10 wETH on Solana and then redeeming the locked 10 ETH on the Ethereum chain. The fundamental aspect, in this case, is to manage the supply and guarantee that both chains are in sync.

Here are some well-known bridges:

  1. Wrapped BTC (WBTC)
  2. Multichain
  3. Portal
  4. Poly Network
  5. Ronin Bridge

Bridges have expanded to a whopping US$12.35B in TVL. The demand for moving assets across chains grows every day. The question is, how safe and efficient are these asset bridges? Unfortunately, bridges have often been targeted and commonly exploited due to the large amounts of funds they hold, with infamous incidents resulting in over $1.8B in compromised funds. Some notable exploits are listed below.

  1. Poly Network: US$600M
    The Poly Network hack occurred because of mismanagement of the access rights to two important protocol smart contracts. As a result, the system was compromised by a hacker that was able to add their own public key to drain the wallet.
  2. Wormhole (Solana): US$321M
    The Wormhole hack occurred due to a deprecated function for verifying signatures during the redemption of tokens. The hacker was then able to mint over 120K wETH tokens by substituting their own verification routine that always says the signature is valid.
  3. Ronin (Axie Infinity): US$625M
    The Ronin bridge fell victim to a phishing attack. The private keys of Ronin validators fell into the hands of the hacker, which then allowed the hacker to drain the funds from the bridge contract.
  4. Horizon (Harmony): US$100M
    Horizon Bridge was another victim of a potential phishing campaign where private keys of their validators of a multisig were stolen.
  5. Nomad: US$190M
    The Nomad hack was a result of a poor operational strategy that led to bad Merkle root initialization, causing every message to be proven valid by default.

Evident in the prevalence of hacks, a primary issue with asset bridges is security. Most DeFi protocols tend to inherit the underlying blockchain’s security mechanism, but bridges today do not. Instead, bridges rely heavily on an independent set of validators rather than those of the PoS chains they serve, leaving them significantly weaker in security.

For example, under the PoA (Proof-of-Authority) consensus architecture, the Solana Wormhole Bridge currently has only 19 “Guardian Network Validators”. The Secure Multiparty Computation model relies on a few multisig keys to authorize any transactions: the Ronin Bridge, for example, requires 4 of the 9 multisig keys to approve a transaction, while Harmony Horizon requires only 2 of the 5 multisig keys for authorization. Last but not least, the WBTC bridge uses a single custodian approach, which poses centralization risks. As a result of the above, bridges are currently the Achilles heel of blockchain ecosystems since they are far more prone to exploits than blockchains themselves.

Other than security concerns, bridges are similar to CEXs in that they cannot process sophisticated arbitrary data. Bridges are essentially cross-chain pawn shops — no one expects pawn shops to pass on complex instructions between two corporations.

Lastly, interacting with most bridges is a cumbersome and tedious task for the average user. Here is an example of a typical bridging process:

To swap ETH on Ethereum to AVAX on Avalanche, one would need to:

  1. Swap ETH to USDC on a DEX
  2. Bridge USDC from Ethereum to Avalanche via the AVAX Bridge
  3. Ensure enough gas fees to complete the final swap on Avalanche by depositing AVAX tokens on your Avalanche wallet
  4. Swap from USDC to AVAX on Avalanche via another DEX

The entire process involves signing transactions at least three times, interacting with three dApps, and switching chains at least one time if the user is on MetaMask. To check transaction status, the user needs to have both Etherscan and Snowscan ready. Without simplifying these processes, bridges and any cross-chain dApps will remain significantly held back by UX hurdles.

Natively Interoperable Solutions

The patch solutions discussed above possess only one interoperable property — connectivity. They fail in every other aspect of security, convenience, ability to process complex messages, and cost-effectiveness. A new generation of solutions decided to bake interoperable properties into their DNA instead of building patches later on.

Full Chain DEX

DEX chains introduce liquidity pools on multiple chains with an intermediary token to facilitate exchange. Examples include THORChain and SifChain. Unlike bridges, full chain DEXs do not wrap assets. Instead, they swap the origin asset against an intermediary token before swapping them into the destination token. These transactions are, of course, enabled by liquidity providers.

For example, on THORChain, when a user wishes to swap ETH on Mainnet to SOL on Solana, users will first send their ETH to the THORChain lockup smart contract. THORChain will then execute the swap from ETH to THOR, followed by THOR to SOL. Subsequently, a message will be sent to the Solana liquidity pool smart contract, which will then release the SOL to the user’s Solana address.

By removing the need for creating wrapped assets through a lock-and-mint mechanism, THORChain, the protocol provides real utility in enabling users to seamlessly swap between native assets between blockchains. This simplistic approach to UI/UX will be a key selling point towards driving mass adoption and pulling over users from centralized alternatives.

Compared to CEXs, full chain DEXs require no KYC. Liquidity is unified as all chains trade against the same “native token-token” liquidity pool. Users do not rely on oracles or security assumptions of the DEX as depeg risks are assumed by the liquidity providers. Full chain DEXs are also scalable as anyone can add liquidity to any pair.

However, THORChain’s intermediate chain design poses a few key risks and nuances. As the THORChain network is secured by a Proof of Bond network where node operators commit a bond of RUNE to underwrite the assets in the DEX’s liquidity pools, node operators are required to increasingly take on more risk as the TVL in liquidity pools grows. Naturally incentivized by the Incentive Pendulum, node operators must bond RUNE equal to the pooled capital to function at optimal state.

This means that setting up a full node on the THORChain network becomes increasingly more capital intensive to run. Currently, the network has 95 active nodes with over $260 million in TVL with full nodes having an average bond of 838,499 RUNE, or $1,468,839.90 at market price. Out of the 95 active nodes, the node with the lowest bonded capital comes up to around 528,000 RUNE or $929,000. As a result, small-time node operators with relatively lower capital are not able to participate in securing the network, consequently causing a centralization of control to node operators with bigger capital budgets.

Inadvertently, this begs the question of whether THORChain or full chain DEXes with similar designs are actually as decentralized as promoted to be. Adding to that, most if not all of Thorchain’s full nodes are hosted on centralized cloud computing services. Out of the 95 nodes, 87 nodes are hosted on major cloud services like Google, AWS and Digitalocean, with AWS taking the largest share of the pie at 38%. Theoretically, this poses a significant risk to the network as cloud computing services can face network outages or even be regulated.

While this interoperability design introduces many novel methods in bridging blockchains to one another through great UI/UX, cleverly designed tokenomics and security mechanisms while retaining its trustless design, the complexity of the protocol had resulted in it being subject to many attacks and security breaches. The THORChain protocol had been exploited 3 times in the past year, losing over $12 million in pooled liquidity to bad actors. As with any new innovation, growing pains are inevitable. The THORChain team has since placed significantly more focus on protocol security as well as introducing new improvements to increase pooled liquidity and overall network decentralization.

Network of Networks

Cosmos and Polkadot are two examples of homogeneous “network of networks”. They are considered layer-0s in the blockchain stack. Both of these layer-0s introduce a standard for any layer-1 blockchain to connect to them and form an interoperable network.

Cosmos realizes interoperability through Inter-Blockchain Communication Protocol (IBC). IBC allows heterogeneous blockchains to communicate in a trustless and permissionless manner by providing a dedicated relay that verifies block states and communicates in the Inter-Chain Standard (ICS). Utilizing IBC, independent blockchains will not have to communicate bilaterally as they do in the case of using bridges.

The Polkadot ecosystem consists of specialized, purposely-built blockchains called parachains. The cross-chain interoperability is achieved via protocols built upon Cross Consensus Messaging (XCM) format. The XCM format is similar to IBC’s ICS, which standardizes cross-chain communications. Two main message-passing protocols for acting on XCM messages exist, namely Vertical Message Passing (VMP) and Cross-Chain Message Passing (XCMP). VMP allows parachains to upload/download messages to/from the relay chain, while XCMP facilitates information exchanges on the relay chain.

While both Cosmos and Polkadot operate on a similar principle, they differ most in terms of connectivity and security mechanisms. Cosmos allows anyone to build on it while Polkadot has a cap on their available parachain slots. Zones on Cosmos rely on themselves for security, while parachains in Polkadot can ride on the Relay Chain’s security mechanism.

With that said, both Cosmos and Polkadot have their own set of challenges to overcome as both design philosophies face a few consequential problems. The first of which is a bootstrapping problem. While Cosmos was built as an open network where anyone can deploy a new chain, the deployers will need to source for a whole new set of validators as security is not shared between heterogeneous blockchains. This process can be time-consuming and ineffective as operating validator nodes can be challenging to those without the appropriate hardware and technical know-how, thus making the pool of potential candidates very limited.

In contrast, Polkadot’s parachains do not need a new validator set as the network opts for a form of shared security in which its parachains are validated by the validators of the Relay Chain. While this may seem to be a plus point in terms of bootstrapping a new parachain, this process is significantly hindered by the requirement for new chain deployers to bid for parachain lease slots in candle auctions. Due to parachains being a scarce resource in the Polkadot ecosystem, the velocity for network growth is held back on a leash as onboarding new parachains becomes a long and tedious process. With all things considered, both the Polkadot and Cosmos ecosystems still struggle to gain significant adoption with approximately $380 million and $1.05 billion in TVL respectively.

Having said that, Cosmos and Polkadot are in the midst of implementing new network upgrades to build a more robust infrastructure that can foster more adoption in the ecosystem. Cosmos is currently implementing interchain security to solve its bootstrapping issue where consumer chains can rely on a provider chain’s validators for security. In enhancing Polkadot’s cross-chain capabilities, the introduction of XCM should promote higher levels of cross-chain composability similar to that of IBC. Although isolated within their own ecosystems, projects like Evmos and Moonbeam attempt to be the interoperable bridges to the EVM-based ecosystems.

Going directly against the Fat Protocol Thesis, app-specific or purpose-specific chains are thought to be the end game of decentralized applications as protocols are no longer restrained by the limitations of the general purpose blockchains that they are built on. This allows project teams to focus on building products and applications that users want to use while maintaining full sovereignty. By design, network of networks like Cosmos and Polkadot open an avenue for decentralized applications to be isolated from censorship risks should general purpose blockchains become more regulated and centralized in the future. As a result, through strong and scalable shared security, natively interoperable app-specific chains, fast and seamless UI/UX, trustless bridges and overall better connectivity to other blockchain ecosystems, Cosmos and Polkadot could spark a paradigm shift in how blockchains can be interconnected.

Relayer-Oracle Protocols

Relayer-Oracle protocols aim to tackle the burgeoning problem of Relayer-Light Client protocols, which is low cost-effectiveness. LayerZero, one of the most prominent contenders in this space, leverages on-chain light nodes to facilitate cross-chain info exchange. The sender chain’s endpoint communicates with specified Oracle and Relayer as well as the receiver chain. The Oracle messages block the header in question to the receiver chain’s endpoint while the Relayer verifies the transaction. Compared to Polkadot XCMP, which relies on a single relay chain to serve as an intermediary and introduces bottleneck risk (if the relay chain fails, interoperability fails), LayerZero’s Relayer-Oracle solution utilizes existing endpoint light nodes for security and has more redundancy compared to relay chain model.

To ensure scalability, LayerZero endpoints are lightweight client nodes. Instead of storing and replicating block headers within the client, which current Repeater-Light Client solutions do, this process is outsourced to Oracles to fetch the block headers from the chain, significantly reducing costs, especially on gas-heavy chains, by eliminating the need to sync block headers every few seconds. Operationally, the LayerZero endpoint functions as a cost-effective on-chain smart contract. The current build of endpoints made it easier to integrate with EVM but still requires custom-build for non-EVM chains.

LayerZero can breed several use cases such as Cross-Chain DEX (Stargate Finance), multi-chain yield aggregators as well as multi-chain lending, all without going through multiple asset hops on different chains. This functionality will effectively solve the major issue of UI/UX in the multichain environment by providing a very seamless experience for users as one would be able to interact with DeFi applications on other sovereign blockchains while only having assets on the source chain. For example, depositing ETH as collateral to Aave’s lending pools on Ethereum mainnet while receiving borrowed USDC on Avalanche.

At its core, LayerZero provides a trustless generic message relaying mechanism that focuses on valid delivery, which can be achieved if the relayer and oracle are independent of one another. There is no need for cross-chain state machine replication or intermediary-wrapped tokens, which drastically reduces bottlenecks and costs.

It is worth noting that LayerZero achieves “trustlessness” by opting for a weaker condition of trust, which is “independence”. As long as Oracles and Relayers are run by independent parties (currently Oracles by Chainlink, Relayers by LayerZero), it is statistically impossible for malicious collusion to occur.

To further ensure the security of the transport layer, LayerZero also introduces the concept of ‘Pre-Crime’ which gives relayers the ability to stop a hack before it happens. Essentially, the Pre-Crime mechanism checks the state of the blockchain in relation to the destination blockchain to verify that no malicious actions were carried out. If a malicious state is detected, LayerZero is able to fork a destination chain before the generic message is delivered and before the transaction is executed.

LayerZero’s implementation of a natively interoperable solution looks to be the most promising with its elegant, secure and cost-efficient design as there are significantly less moving parts as compared to a traditional lock-and-mint bridge, full chain DEX and even network of networks design. By outsourcing the process of data retrieval to independent off-chain Relayers and Oracles, cross-chain messaging becomes a lot more efficient. To scale, LayerZero only requires the connecting blockchains to be smart contract enabled for the deployment of its smart contract endpoints.

While some may argue that in its current state that LayerZero is not entirely decentralized as Relayers are operated by the LayerZero team, the long-term vision is to eventually allow anyone to independently set up a Relayer to support the platform. Compared to aforementioned designs, this would significantly reduce the time to bootstrap and connect to new chains as there is no need to source a new set of validators like with Cosmos and Polkadot based chains.

Honorable Mentions

Below are some interoperable solutions that we have researched for this article. We could not cover all of them in one piece, but they each possess a unique forte for the interested readers.

  • Synapse: Cross-chain AMM and Bridge
  • Hop Protocol: Rollup to rollup general token bridge
  • Axelar Network: Chain-agnostic interoperability layer connecting Layer 1s
  • Connext: Liquidity network that transfers assets cross-chain using atomic swaps
  • Router Protocol: Cross-chain messaging protocol built as a mesh network of chains connected via nodes
  • ICON Network: Generalized cross-chain messaging using on-chain light clients
  • Across: Layer 2 cross-chain bridge
  • Bungee Exchange: Bridge aggregator

According to DeFiLlama’s Bridge and Cross-Chain categories, out of US$13.52B TVL, US$12.49B is locked within traditional lock-and-mint bridges like Wrapped BTC, Multichain and Portal. While not accounting for the various chains within the Cosmos and Polkadot ecosystems, the data suggests a huge disparity between the adoption of bridges and natively interoperable protocols, despite the innovation and safety enhancement brought by the latter. This then begs the question of “What’s stopping better interoperability solutions from being widely adopted?” Here are three reasons we think why:

Ease of Usage

MetaMask wallet remains one of the most widely used wallets in the crypto industry. This is because MetaMask is compatible with all EVM-based chains and allows the seamless toggling between EVM chains with the same address being used for all chains. While many newer natively interoperable solutions like Stargate (LayerZero), Synapse and Hop Protocol come readily integrated with MetaMask, most Cosmos and Polkadot chains use their ecosystem’s native wallets like Keplr and Polkadot JS. The need for users to download a new wallet application and create a new wallet adds significant friction to the user experience. This design may further deter new users from entering the ecosystem to try out newer and more innovative options.

Information Asymmetry

In an already nascent industry, the sheer number of interoperability protocols launched in the past two years have made it increasingly difficult to track and determine the optimal route for users to engage in cross-chain activities. As a result, the protocols that attract the most users tend to be those which have official partnerships with the corresponding blockchain’s development team or foundation. In the case of Evmos, Nomad Bridge was the official gateway recommended to new users to bridge in their assets from other chains.

Official partnerships are often regarded by users as endorsements on the recommended protocol’s safety and trustworthiness, despite explicit DYOR warnings. In Evmos and Nomad’s case, Nomad bridge attracted the most volume with over US$445.3M in transaction inflows as users trusted Evmos’ recommendation, only to be exploited on 1 August 2022 with over US$186M lost to the bridge’s attackers.

This brings us back to the problem of information asymmetry. While there may be more cost-efficient and quicker bridging solutions, users tend to follow the crowd and choose the most ‘trusted’ and ‘safest’ protocols. Thus, information asymmetry could have stopped new natively interoperable protocols to attract more users simply because they haven’t generated enough awareness.

Interoperability Between Ecosystems

Traditional lock-and-mint bridges still remain the most accessible form of interoperability as there are readily available paths for users to get their assets onto any chain across EVM and non-EVM ecosystems. Although interoperability solutions like IBC transfer work for Cosmos, they only work within the Cosmos ecosystem itself. If users want to bridge their assets from Cosmos to EVM chains, for example, they would need to use another solution like Axelar’s Satellite Bridge.

With regard to LayerZero, the protocol currently only has cross-chain messaging enabled for most major EVM-compatible chains and Ethereum Layer-2s like Arbitrum and Optimism. The protocol has yet to expand its connectivity to non-EVM chains like those in the Cosmos ecosystem and Solana.

The lack of intra-ecosystems interoperability could also partially be due to how these projects are funded. Different VCs backed different ecosystems and are unlikely to open up their realms to others unless there’s material financial benefits. It’s a prisoner’s dilemma between VCs as the narrative remains to build one ecosystem that rules all — the first to transit into a collaborative narrative takes lots of risks.

Interoperability between ecosystems is very much still fragmented and the space sorely lacks a bridge aggregator that can seamlessly aggregate liquidity across all bridges, liquidity networks and cross-chain messaging protocols. As a result, traditional lock-and-mint bridges will still remain the most popular choice as they allow for the highest degree of interoperability and convenience when moving assets between the different blockchains as of now.

Lack of Interoperability Use Cases

Another reason behind natively interoperable protocols’ sluggish TVL is that not many extra interoperability use cases exist other than bridging tokens. Therefore, the average users are not incentivized to use Stargate, THORChain, or Cosmos ecosystem, as the added complexity does not award them added benefits.

As we discussed above in the LayerZero paragraph, a natively interoperable protocol could lead to interactions with other sovereign chains without having assets on them — that use case would be a significant incentive for users to migrate from bridges to new natively interoperable solutions, as simply bridging tokens around would become far less convenient than having collaterals on one chain and borrow on others immediately.

We realize this results in the occurrence of a causality dilemma, or rather the ‘chicken-and-egg’ question between protocols building interoperability use-cases and interoperability solutions becoming available. However with more natively interoperable designs surfacing, we believe developers on the application layer would pick up speed in innovations.

Judging by the current state, no single blockchain can dominate the entire industry in an efficient and user-friendly manner. Each chain has a niche by-design, but developers and VCs are blinded by the short-term urge to excel at everything and attract TVL, leading to similar yet independent offerings to users. New projects, such as emerging L1 chains, claim to solve the Blockchain Trilemma while in fact just clandestinely sacrificing one or two pillars for others.

We think the real answer to the Blockchain Trilemma is interoperability, while the answer to the Interoperability Trilemma is natively interoperable solutions rather than patches being built on mutually exclusive chains. The previous winner-takes-all model of crypto VCs had de facto worked against building inherently interoperable projects; but as more realized the potential of a truly interoperable blockchain universe, talents and capital had started flowing into the natively interoperable solutions.

The potential network effect in generalized cross-chain networks may be more powerful than the narratives we saw before. Being vested in interoperability projects is a chain-agnostic method to bet that the blockchain industry will overcome the hurdle to mass adoption. Web3.0 is at an inflection point, and we look forward to a future where builders and users thrive in a mutually connected blockchain universe. WAGMI.


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By akohad

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