Multi-Chain & Blockchain Interoperability Status Quo 2023

This article was originally published on CV VC's 'The German Blockchain Report 2023'.

Introduction

This article is a snapshot of the crypto ecosystem in 2023. We will cover a few things, starting with crypto’s multi-chain reality and fragmentation problem. Then, we will outline a few of the most forward-looking ideas bouncing around the crypto industry. Lastly, we will make a short case for why aggregators like LI.FI are best positioned among all infra players to succeed in 2023 and beyond.

Crypto is Multi-Chain

Ethereum’s Total Value Locked (TVL) dominance has dropped from 96% in 2021 to ~50% this year. Much of the TVL and transactions are now happening on L2s and alt L1s, and this trend is likely to continue. 

L2s on Ethereum are expanding from one-off scaling solutions to connected rollup ecosystems (Superchain, Orbit, Hyperchains). Cosmos’ Appchains have potential, with dYdX set to launch this year and native USDC coming to the ecosystem via Noble. Solana is still thriving as a monolithic, single-chain haven for developers in what is increasingly becoming a modular world. Alternative L1s like Polygon (Polygon 2.0), BNB Chain (opBNB), and Avalanche (Subnets) have also launched scaling infrastructure. Rollups as a Service players like AltLayer, Conduit, and Eclipse are looking to further add to this stack. 

With that in mind, the following outlines major milestones across various chains, with a specific focus on L2s, highlighting the multi-chain reality of crypto:

The Layer 2 Revolution

Arbitrum

On Feb 21, 2023, Arbitrum became the first rollup to surpass Ethereum Mainnet in daily activity. Going one step further, on March 23, 2023, Arbitrum surpassed Ethereum by 2.5 times – 2.73M transactions on the network compared to Ethereum’s 1.08M. On that day, Arbitrum accounted for 66% of the total activity on all L2s.

Arbitrum also launched a beta version of an L3 scaling solution called Arbitrum Orbit – a product offering allowing anyone to create and own a self-managed Arbitrum Rollup. These Orbit chains will settle to one of Arbitrum’s L2 chains (One, Nova, or Goerli). 

Optimism and the Superchain

In 2023, the OP Stack and the Superchain have gone from an ambitious vision to a reality.

Superchain is Optimism’s vision for the future, where Optimism Mainnet and other chains will merge into a single unified network for OP Chains. This will require social and technological buy-in from teams, as explained in the recent Law of Chains governance post. 

• Base (by Coinbase) – The on-chain summer hype around Base is real, with new dApps like Friend Tech and DeFi blue-chips like Uniswap, Curve, and Aave, among others, adding support for the chain within a few days of the chain’s launch. As a result, Base hit the milestone of 100,000 ETH bridged within 20 days post-launch. 

• Zora – one of the most popular NFT platforms in crypto that launched Zora Network, a fast, cost-efficient, and scalable Layer 2 built to help bring media on-chain on the OP stack.

• Worldcoin –  Optimism surpassed Arbitrum in daily transactions for the first time since January 2023 on July 24, the same day the Worldcoin (WLD) token went live on the Optimism mainnet. Worldcoin has committed to supporting the Optimism Collective in bringing the Superchain vision to life. 

• Farcaster – a decentralized social media protocol with >10,000 active users.

• Others: Public Goods Network, Aevo

In tandem, multiple teams launched an OP Stack Chain this year. These rollups are forked from the OP Stack but are not part of the Superchain collective. The list includes:

• opBNB – a Layer 2 scaling solution launched by the Binance team. The BNB Chain is designed to provide an average gas fee for transfers as low as $0.005.

• Mantle – Mantle’s base chain is built on top of the OP Stack. It is EVM compatible, offering developers a familiar environment as the same developer tooling is available for all EVM chains.

Owing to the rapid growth of Arbitrum, Optimism, OP stack chains, and other L2s like Mantle, Ethereum layer 2 activity continues to increase throughout the bear market.

The Layer 1 Competitive Landscape

Ecosystems like Cosmos have gained ground with their bluechip appchains like dYdX nearing mainnet launch, whereas we’re seeing a resurgence in the Solana DeFi ecosystem and real-world adoption of the chain with integrations like Solana Pay enabled on Shopify.

• The Cosmos appchain thesis is taking shape with over 250 applications and services building on Cosmos that offer a wide range of use cases, including DeFi, gaming, NFTs, and more.

• Solana has over 96k daily active users (monthly average over 180D, per Token Terminal) and has processed nearly 216.23B transactions.

• Over 1.16B unique wallet addresses have interacted with the Bitcoin blockchain.

• Over 469 dApps like Aave, Quickswap, Klima DAO, and Gains Network are building on Polygon and have onboarded 341.3M unique wallets to the network.

• Over 560 dApps, like PancakeSwap, Venus, Alpaca Finance, and Thena, have deployed on BNB Chain and onboarded 380.6M unique wallets to the network.

• Avalanche puts a strong focus on developer adoption and has over 290 applications and a growing ecosystem of Subnets (~22). Avalanche also launched ‘Evergreen’ subnets for institutional blockchain development, which is touted to see adoption in the coming years.

With Multi-Chain Comes Fragmentation

Aiming to connect all of these blockchains, scaling solutions, and rollups (there isn’t a single connective word that can be used as a catch-all anymore) is a large group of infra players creating isolated silos of tokens, languages, and developers. Third party-bridges like LayerZero and Axelar are attempting to become the HTTPS of crypto. Shared sequencing is a hot idea, with Astaria and Espresso looking like the early leaders in that niche. Liquidity networks (Across, Connext) and stablecoin bridges (CCTP, Frax Ferry) continue to connect assets between disparate chains. Modular systems, led by Celestia, are trying to break up data availability and settlement between chains. 

In other words:

No infra player has won the battle for ubiquitous liquidity. Therefore, liquidity is fragmented.

Major infrastructure players can be bucketed into the following six categories:

• Liquidity networks – platforms like Across, Connext, Hop, cBridge, Squid, Synapse, and Thorchain offer a wide range of token-bridging solutions that vary in speed, cost, capital efficiency, security, and chain support. Heightened competition among liquidity networks vying to be the best routing choice for consumer interfaces (Jumper) and aggregators (LI.FI) has improved efficiency for cross-chain swaps. 

• Stablecoin bridges – The introduction of stablecoin bridges, such as Circle’s Cross-Chain Transfer Protocol (CCTP), enabled the widespread, canonical distribution of native stablecoins (like USDC) across chains. Stablecoin bridges let users or developers transfer assets between chains at high speed for zero fees and without slippage.

• Arbitrary Message Bridges (AMBs) – arbitrary messaging bridges allow any data (token, message, contract call) to be sent across chains. This allows for many use cases, like xApps and cross-chain governance. LayerZero, Axelar, and Wormhole are three of the most prominent players in this realm. 

• Oracle-based bridging – Oracles have been used in bridge designs for a long time. For instance, LayerZero uses Oracles in its Oracle-Relayer-based design, while teams like Across use UMA’s optimistic oracle to enable optimistically secure cross-chain swaps. Taking this further, Chainlink, the leading Oracle service provider, has ventured into the cross-chain messaging niche with Cross-Chain Interoperability Protocol (CCIP). This solution leverages Chainlink’s Decentralization Oracle Network (DON) to facilitate cross-chain messaging. 

• Omnichain token standards – these standards enable tokens to be burned and minted on any chain to power cross-chain swaps – instead of locking tokens on one chain and minting them on another. Almost every arbitrary messaging bridge has created a token standard (LayerZero’s OFTs, Wormhole xAssets, Axelar’s Interchain Token Service, and Connext’s bridge agnostic token standard xERC-20).

• Rollups as a Service – In the era of scaling solutions, Rollups as a Service providers make life easier for developers by providing the convenience and customizability to launch production-ready rollups. Such initiatives will be key in making the vision of 1000s of appchains a reality. AltLayer, Conduit, and Caldera are burgeoning solutions here. 

Crypto Beyond 2023

From time to time, ideas and philosophies emerge, potentially changing how things are done in crypto. These ideas can be found on Paradigm’s blog, your favorite threadooor’s feed, and this article. 

Let’s look at some of such concepts for crypto in 2023 that are not ready for production but are being worked on:

• Storage proofs – By leveraging zk technology and smart contracts, storage proofs verify the state of one chain on another without transmitting messages between them. Teams like Axiom, Lagrange, and Herodotus are working on storage proofs, especially in ecosystems like Starknet. Storage proofs offer a new approach to blockchain interoperability. Currently, the primary method used is messaging bridges to relay an action from blockchain A to blockchain B. However, these bridges encompass a vast design space, and many solutions compromise trust-minimization to address specific use cases better – storage proofs are a trust-minimized alternative to bridges.

• Intents – Though still in the research phase and actively being experimented on a protocol level, intents are becoming a focal point in crypto discussions. This concept emphasizes the need for simplifying on-chain interactions away from the users. The aim is to allow users to express their intentions, leaving the protocols to figure out how to achieve them. At a small scale, CoW Swap, UniswapX, and LI.FI are first-generation intent protocols for limit orders. As more work is done on intents and intent-based protocols emerge, they could uniquely reshape UX and execution efficiency in crypto by minimizing user-facing complexity in executing transactions – especially if the systems being developed at Suave, Essential, or Anoma become mainstream.

• Shared Sequencers – Having a shared resource responsible for ordering transactions of a set of rollups can significantly enhance the potential for MEV (Miner Extractable Value) optimization through the strategic ordering, reordering, and insertion of transactions within batches. Shared sequencers also unlock the potential for atomic swaps between rollups – which might be very interesting for Superchain or Orbit. This is an emerging area of study, with ongoing research focused on understanding the interoperability across chains when using a shared sequencer. A key question is whether this approach can enable atomic composability, allowing for seamless multi-step transactions across different rollups. Espresso and Astria are currently the thought leaders here. 

• New age liquidity networks – Emerging liquidity networks, such as Khalani and Catalyst, represent a new age of scalability and interoperability. Unlike some traditional designs of liquidity networks that face challenges in scaling and connecting with multiple chains, these new players are designed to scale and cater to the bridging needs of users, especially as we approach a world with a potential of 1,000 different chains.

Why Aggregation Is Positioned Perfectly

From the above sections, it is clear that an aggregator is best suited to take advantage of crypto's current state and thrive in the future. 

No Single Bridge Can Extend To Match Multi-Chain Demand

20+ high-quality chains already exist, and more are popping up frequently thanks to open-source frameworks like OP Stack. Furthermore, Interconnected rollup collectives (or federations) will be built on shared resources, and rollups-as-a-service providers will only multiply – meaning that deploying a rollup will only become easier. This implies that a future with 1000s of active chains) isn’t far away. 

The more chains, the more challenging interoperability is to facilitate. For example, single liquidity networks struggle to extend across chains due to constraints of liquidity providers, and arbitrary messaging bridges struggle to add support for chains due to different virtual machines, languages, and consensus mechanisms of the different chains. Since aggregators like LI.FI can leverage the extensibility of different solutions in their stack; they can support a wider range of chains for any use case. 

Emerging Technologies Do Not Disrupt Aggregators – They Make Aggregators Stronger

Cross-chain swaps via liquidity networks are going through a phase of disruptive change with the emergence and adoption of stablecoin bridges and token standards. While these concepts are overall net positive for the efficiency of cross-chain swaps, for protocols to be able to support them, there’s a need for standardization, and that is where aggregators like LI.FI will again play a pivotal role.

Emerging technologies like storage proofs and zk bridging solutions could be an existential threat to existing interoperability solutions. However, aggregators can effectively integrate any new tech in their stacks and always offer their clients and users access to the best tech the industry has to offer.

Conclusion

Aggregators like LI.FI have evolved to offer much more than just cross-chain swaps. They can leverage bridges to offer functionality such as cross-chain zaps, contract calls, multi-message aggregation, and any-chain/token NFT payments, among others. Doing so allows aggregators to fulfill a broad spectrum of intents in a multi-chain environment.

For DeFi projects and TradFi institutions, staying updated with the rapid changes in the ecosystem is often infeasible. Maintaining cross-chain tech can be resource-intensive, and not all teams have the capacity to manage it internally. Aggregators like LI.FI have a dedicated team of developers and researchers focused on building the best aggregation solution for the changing multi-chain ecosystem. They offer it via their SDK, API, or widget to clients looking to extend such functionality to their users. Partnering with aggregators might soon become a crucial strategic move for many teams.

As the multi-chain ecosystem expands and evolves, the role of aggregators becomes pivotal. At LI.FI, we’re heads down building infrastructure abstraction tools that can help teams access all the liquidity and users in DeFi and dominate the multi-chain crypto ecosystem. 

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Disclaimer: This article is only meant for informational purposes. The projects mentioned in the article are our partners, but we encourage you to do your due diligence before using or buying tokens of any protocol mentioned. This is not financial advice.