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Igniting Liquidity Cross Chain At The Speed Of Light | Alex Smirnov

By Lightspeed

Published on 2024-05-02

DeBridge co-founder Alex Smirnov discusses the evolution of cross-chain infrastructure, intent-based bridging, and bringing liquidity on-chain at the speed of light.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

The Evolution of Cross-Chain Infrastructure

The cryptocurrency landscape has undergone significant transformations since the inception of cross-chain solutions. Alex Smirnov, co-founder of DeBridge, provides valuable insights into this evolution, tracing the journey from the early days of cross-chain arbitrage to the current state of high-performance cross-chain infrastructure.

DeBridge's origin story is rooted in a practical need - solving cross-chain problems for their own blockchain development company. In 2020, Smirnov and his co-founder were among the pioneers of cross-chain arbitrage between Ethereum and the BNB Chain. However, they quickly encountered limitations with the existing infrastructure, particularly when it came to efficient liquidity rebalancing.

"Sometimes exchanges blocked withdrawals, sometimes exchanges suspended accounts," Smirnov recalls. "Or sometimes just withdrawals were imposed because there was no sufficient liquidity on the hot wallets." These challenges highlighted the need for an efficient, non-custodial infrastructure that could transfer both information and liquidity across chains.

The trigger for DeBridge's development came from an unexpected source - a hackathon in April 2021. What started as a fun project to build a proof of concept quickly gained traction, winning first place among 150 projects worldwide and attracting significant interest from venture capitalists and partners.

The Foundation of Cross-Chain Interoperability

At the core of cross-chain interoperability lies messaging - the ability to transfer information in a decentralized fashion. However, Smirnov emphasizes that messaging alone is insufficient. Users and protocols primarily need to transfer value between chains, a functionality that cannot be built without efficient messaging infrastructure.

From its inception, DeBridge was designed as a cross-chain messaging infrastructure, with value transfers being one of the first utilities built on top of it. The initial version employed a classical synchronous approach, utilizing liquidity pools on different chains. Users would deposit liquidity into a pool on one chain and receive the transferred amount from a pool on another chain.

However, this approach quickly revealed its limitations. Liquidity pools emerged as a significant bottleneck in terms of security, scalability, and capital efficiency. The discrete nature of cross-chain transfers, coupled with the continuous need to incentivize liquidity providers, made it challenging to maintain a capital-efficient or profitable infrastructure.

Security Challenges in Cross-Chain Solutions

Security concerns have plagued the cross-chain space, with bridges often becoming prime targets for hackers. Smirnov attributes this vulnerability to the large amounts of Total Value Locked (TVL) in these protocols, creating substantial honeypots for malicious actors.

"That's probably one of the reasons why we've seen so many hacks in the cross-chain space and bridges are like target number one for like Rosara's group and all the malicious actors," Smirnov explains. This observation underscores the critical need for more secure cross-chain solutions.

Scalability and User Experience Issues

Beyond security, scalability emerged as a significant challenge. The traditional liquidity pool model imposed limitations on transfer sizes based on available liquidity. Moreover, the use of intermediary assets and AMM curves introduced slippage, making the bridging process unpredictable for users in terms of the final amount received.

Smirnov highlights this unpredictability as a major user experience issue: "Users never know how much of asset they will receive on the destination chain. That's why bridging some is an unpredictable process in terms of the price." The best users could do was specify a slippage tolerance, which still left room for uncertainty.

The Shift to Intent-Based Bridging

Recognizing these limitations, DeBridge pioneered a shift towards an intent-based bridging model. This approach differentiates cross-chain asset custody from cross-chain trading, addressing the scalability, security, and capital efficiency issues inherent in the liquidity pool model.

In the intent-based model, users control the execution and, by extension, the price. Smirnov explains, "When we create the intent, we're just providing some reward for the action that we want to get done." This model allows users to specify their desired outcome, similar to a limit order, providing greater control and predictability.

The Mechanics of Intent-Based Bridging

The intent-based approach enables asynchronous operations, eliminating the need for immediate cross-chain messaging. When a user creates an intent, solvers or market makers compete to fulfill it based on profitability. This competition ensures fast execution without the delays associated with cross-chain messaging.

Smirnov elaborates on the process: "When intent is created, there is no cross-chain communication. So just like all the solvers or market maker, they see directly from the chain that there is a new intent created, they immediately evaluate its profitability." If profitable, solvers compete to execute the action on the destination chain as quickly as possible.

This model shifts risks from users to professional market makers, who take on challenges related to transaction finality, reorgs, inventory management, and asset custody. For users, the bridging operation becomes as seamless as a trade on a centralized exchange, with settlement occurring within seconds.

Institutional Liquidity and MPC Wallets

To address the challenge of institutional-grade liquidity, DeBridge collaborated with Rockaway, a fund from the Czech Republic. They developed an innovative setup using MPC (Multi-Party Computation) wallets, allowing market makers to propose transactions without having direct control over the liquidity.

This arrangement, facilitated by the MPC infrastructure provided by Fireblocks, enables institutional-grade liquidity management without the need for collateral posting. Smirnov notes the uniqueness of this setup: "This kind of setup would never be possible in TradFi where you can manage liquidity without having like control over that liquidity even without posing collateral."

High-Performance Infrastructure and Solana

DeBridge's focus on high-performance infrastructure aligns well with blockchain ecosystems like Solana. Smirnov expresses bullishness on high-performance infrastructures, citing their ability to provide quick finality and decentralization.

"Solana becomes very, you know, convenient for many broader use cases, such as payments," Smirnov observes. He draws a parallel with credit card transactions, emphasizing the need for near-instant finality in real-world applications.

The integration with Solana has been a significant focus for DeBridge, with the team dedicating nearly two years to building on the platform. This investment paid off, especially after the Solana Breakpoint conference in November 2023, when the broader crypto community recognized the value of Solana's speed, security, and finality.

The Role of Solvers and Market Makers

In the intent-based model, solvers and market makers play a crucial role in fulfilling user intents. These sophisticated actors take on balance sheet risk to provide liquidity and execute trades across chains.

Bootstrapping this ecosystem of solvers presented initial challenges. Smirnov recalls, "Big market makers were not really interested because they used to operate on the centralized exchanges as well and they are interested only if there is like multi-millimeter opportunity that is easy to grab."

To overcome this, DeBridge built and open-sourced their own solver script. As volumes grew, they observed increasing competition from MEV researchers and sophisticated actors optimizing for speed. This organic growth of the solver network has been key to DeBridge's success.

Fee Compression and Future Optimizations

As the cross-chain infrastructure matures, fee compression becomes an important consideration. DeBridge currently adds a small incentive (around 4 basis points) for solvers, plus a fee for the bridge infrastructure.

Smirnov envisions future optimizations, such as direct matching of intents between users: "Let's say if I'm bridging from Ethereum to Solana, and you're bridging from Solana to Ethereum, then we don't need to have market maker or solver. We can preserve those 4-bits to be takers for each other."

While such optimizations are not immediately necessary, they represent the potential for even more efficient cross-chain transactions in the future.

Bringing Global Liquidity On-Chain

The vision of bringing global liquidity on-chain faces several challenges. Smirnov identifies asset custody as a primary hurdle, particularly when bootstrapping new ecosystems or chains.

He explains, "You need to have the custody solution that allows to bring any asset to the ecosystem." This includes both on-chain assets, facilitated by canonical bridges, and real-world assets, exemplified by solutions like Circle's USDC.

Once custody is solved, the focus shifts to enabling efficient trading. This requires robust cross-chain infrastructure and a network of professional market makers to settle trades quickly and seamlessly.

Trust Assumptions and Risk Management

In the intent-based model, many risks are shifted from users to market makers. However, some trust assumptions remain, primarily related to smart contract security and validator integrity.

Smirnov emphasizes DeBridge's commitment to security: "We are one of the on-the-bridge that never had security problems or discovered vulnerabilities, and we've been super proud to maintain this high bar of security standards in the cross-chain space."

The intent-based approach also reduces risks associated with cross-chain messaging, as the locked liquidity is limited to the amount of transfers being settled at any given moment, rather than a large, static liquidity pool.

Validator Set and Future Decentralization

Currently, DeBridge operates with a set of 11 validators, selected based on performance and reliability. However, Smirnov outlines plans for future decentralization, including the introduction of a token and governance mechanisms.

The vision involves allowing governance to determine the number of validators and their selection criteria. Importantly, validators will be required to provide slashable collateral, creating a strong incentive for proper behavior.

Smirnov explains the goal: "We don't really need to chase the maximum number of validators, but we need to try and maximize their slushable collateral, their financial guarantees." This approach aims to create a robust, secure validation layer without necessarily maximizing the raw number of validators.

The Future of Cross-Chain Infrastructure

As the cryptocurrency ecosystem continues to evolve, the importance of efficient, secure cross-chain infrastructure becomes increasingly apparent. DeBridge's intent-based model represents a significant step forward, addressing many of the limitations inherent in earlier approaches.

By shifting complexity and risk from users to professional market makers, and by leveraging high-performance blockchains like Solana, DeBridge is paving the way for a more interconnected and liquid crypto economy. As Smirnov puts it, "DeFi does not wait," and solutions like DeBridge are ensuring that cross-chain liquidity can move at the speed required by modern financial markets.

The future of cross-chain infrastructure looks promising, with ongoing innovations in areas such as institutional liquidity provision, validator incentives, and fee optimization. As these technologies mature, we can expect to see even greater interoperability and efficiency in the crypto ecosystem, potentially bridging the gap between traditional finance and the world of decentralized assets.

Facts + Figures

  • DeBridge was founded in 2021 and is currently processing over 120 million in weekly volume.
  • The company won first place in a global hackathon in April 2021, competing against 150 projects worldwide.
  • DeBridge initially used a classical synchronous approach with liquidity pools but shifted to an intent-based model to address scalability and security issues.
  • The intent-based model allows for settlement of cross-chain transfers within seconds, compared to potentially 30 minutes or more with traditional bridging methods.
  • DeBridge currently has 11 validators in its network, selected based on performance and reliability.
  • The company has never experienced security problems or discovered vulnerabilities in its infrastructure.
  • DeBridge collaborated with Rockaway, a fund from the Czech Republic, to develop an innovative MPC wallet setup for institutional liquidity management.
  • The integration with Solana took nearly two years of development before launching in production in June 2023.
  • DeBridge's Explorer shows around 300 different wallets have acted as solvers, with 5-6 dominating the market share due to their superior performance.
  • The company adds a 4 basis point incentive for solvers, plus an additional fee for the bridge infrastructure.
  • DeBridge has zero marketing budget, relying on product quality and user experience for organic growth.
  • The company plans to introduce a token and decentralized governance in the future to manage validator selection and infrastructure parameters.

Questions Answered

What is DeBridge?

DeBridge is a high-performance cross-chain infrastructure that enables the transfer of information and value between different blockchain networks. It was founded in 2021 after winning a global hackathon and has since evolved to process over 120 million in weekly volume. DeBridge's primary innovation is its intent-based bridging model, which addresses scalability, security, and capital efficiency issues present in traditional liquidity pool-based bridging solutions.

How does intent-based bridging work?

Intent-based bridging allows users to specify the desired outcome of their cross-chain transfer, similar to a limit order. Users create an intent, offering a reward for the action they want to be completed. Professional market makers or solvers then compete to fulfill this intent by executing the required actions on the destination chain. This model enables fast settlement times, typically within seconds, and shifts risks from users to these sophisticated actors who are better equipped to manage them.

What are the advantages of DeBridge's approach compared to traditional bridging methods?

DeBridge's intent-based approach offers several advantages over traditional bridging methods. First, it provides faster settlement times, often within seconds compared to potentially 30 minutes or more with other bridges. Second, it improves capital efficiency by not requiring large, static liquidity pools. Third, it enhances security by reducing the size of potential attack vectors. Lastly, it offers users more control and predictability in terms of the final amount they will receive, addressing the unpredictability issue present in liquidity pool-based models.

How does DeBridge ensure security in cross-chain transfers?

DeBridge prioritizes security through multiple layers. At the smart contract level, they maintain high security standards and have never experienced security problems or discovered vulnerabilities. The intent-based model itself reduces risks by limiting the amount of locked liquidity at any given time. Additionally, DeBridge plans to implement a system of slashable collateral for validators, creating strong financial incentives for proper behavior. The company also shifts many risks from users to professional market makers who are better equipped to manage them.

What role does Solana play in DeBridge's infrastructure?

Solana plays a significant role in DeBridge's infrastructure as a high-performance blockchain that aligns with their focus on speed and efficiency. DeBridge spent nearly two years developing on Solana before launching in production in June 2023. The team views Solana's quick finality and balance of decentralization as key advantages, particularly for use cases requiring fast settlement times like payments. The success of Solana integration has reinforced DeBridge's belief in the importance of high-performance infrastructures in the blockchain ecosystem.

How does DeBridge plan to decentralize its operations in the future?

DeBridge has plans to introduce a token and implement decentralized governance mechanisms in the future. This governance system will allow token holders to decide on key parameters of the infrastructure, such as the number of validators and their selection criteria. A key focus will be on maximizing the slashable collateral that validators must provide, rather than simply increasing the number of validators. This approach aims to create strong financial incentives for proper behavior while maintaining the efficiency of the network.

What challenges remain in bringing global liquidity on-chain?

According to Alex Smirnov, the primary challenges in bringing global liquidity on-chain revolve around asset custody and efficient trading infrastructure. For new blockchain ecosystems, solving the custody problem is crucial, requiring solutions for both on-chain assets (via canonical bridges) and real-world assets (like Circle's USDC model). Once custody is addressed, the focus shifts to building robust cross-chain infrastructure and cultivating a network of professional market makers to enable quick and seamless trade settlements across different blockchains.

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