Author: PSE Trading Analyst @Daniel Hua, PSE Trading

Introduction

In the blockchain world, each network can be regarded as an independent ecosystem with its own native assets, communication rules, etc. However, this feature also makes blockchains incommunicable, making it impossible for assets and information to flow freely. Therefore, the concept of cross-chain interoperability came into being.

1. The significance and usage scenarios of cross-chain interoperability

Defi is the core and foundation of today’s blockchain, but it faces many challenges, such as liquidity fragmentation, insufficient asset pool depth, and low capital utilization. The emergence of cross-chain interoperability protocols can integrate the assets of various chains into a unified smart contract, thereby maximizing user experience and capital utilization. Under ideal circumstances, cross-chain interoperability protocols can reduce wear and tear to zero.

for example:

(1) Put the assets of the OP chain into GMX on the ARB chain to increase the depth of the fund pool

(2) Put the assets of the OP chain into Compound on ARB for mortgage lending

(3) Realize cross-chain transfer of NFT assets

In addition to financial aspects, the transfer of information is also particularly important: for example, cross-chain voting for important proposals, data transfer between Social dapps, etc. If Defi opens the door to the cryptocurrency world, the cross-chain interoperability protocol is the only way to success!

2. Cross-chain interoperability protocols are divided into four types

2.1 Verification based on node or third-party network (first type)

The most original cross-chain protocol uses MPC (Multi-Party-Computation) for transaction verification. Thorchain is a typical representative, which verifies transactions by deploying nodes on the chain to establish security standards. Typically, this protocol will attract 100-250 node validators on the network. However, the disadvantage of this method is that each node needs to verify the transaction, causing users to wait for a long time. In addition, the operating costs of nodes cannot be ignored for the protocol and will eventually be passed on to users. Secondly, Thorchain will set up a Liquidity Pool for each trading pair, using the project’s native token RUNE. Every time you cross assets, you need to exchange the assets into RUNE, and then exchange them for the target chain assets. This model requires a lot of funds to support and has Wear and tear, in the long run, this is not the optimal solution for cross-chain protocols**. Tips: Thorchain was attacked because of code vulnerabilities (the system will treat fake ETH symbols as real ETH symbols), and has nothing to do with the security of the verification method.

2.1.2 Improvement

Changes based on this phenomenon: Wormhole selects 19 Validators to verify the authenticity of transactions. These validators include well-known node validators such as Jump crypto. These validators also run verification services on other networks such as ETH and OP. However, this method has the risk of being too centralized. The author believes that complete decentralization may not always be the best choice, because a certain degree of centralized management can To reduce costs and expenditures, the final project must be to achieve large-scale use and maximize economic benefits. Tips: Wormhole was attacked because of contract vulnerabilities. The attacker used external contracts to verify transactions and steal assets, which has nothing to do with its own verification security.

Compared with other cross-chain protocols, Axelar is a public chain based on POS. Axelar packages the verification information from other networks and sends it to its own main network for verification, and then sends it to the target chain after completion. It is worth noting that **verification cost is inversely proportional to security. As the number of verification information increases, more nodes are required to participate in verification and maintain network security. In theory, there is no upper limit for nodes, and the increase in the number of nodes will increase the cost of transfers. Axelar will encounter this dilemma in the future. **

2.2 Optimistic verification (second type)

The success of OP represents optimistic verification of the current safety, reliability, low cost and speed advantages. Therefore, cross-chain protocols such as Synapse also adopt this verification mode. However, Synapse uses the Lock/Mint method to exchange assets. This method is at risk of being attacked by hackers. The author will explain the reasons in 2.3.1. In addition, optimistic verification can only meet current needs, and more secure and reliable verification methods will be needed in the future while still maintaining speed and cost advantages. Now the author will introduce double verification to replace optimistic verification.

2.3 Double verification (the third type)

The most talked about two-factor authentication protocols on the market are Layerzero and Chainlink. Let’s talk about the conclusion first. The author believes that double verification has the clearest development prospects in the field of today’s cross-chain protocols. It is superior to other protocols in terms of security, speed and response time.

（1）Layerzero

One of Layerzero’s innovations is to deploy ultra-light nodes on each chain to transmit data to off-chain relayers and Oracles (provided by Chainlink) for verification. Compared with the first protocol, it avoids heavy computing tasks. Oracle generates block header information, and Relayer verifies the authenticity of the transaction. Only when there are no errors between the two, the transaction will be released. **It should be emphasized that both run independently. Only when hackers control Relayer and Oracle at the same time will assets be stolen. Compared with optimistic verification, security is higher because it verifies every transaction. **

Cost and security advantages: The author conducted experiments with Stargate (using Layerzero technology)

1. From OP to ARB takes 1 minute to complete the transaction - $1.46

2. From OP to BSC takes 1 minute to complete the transaction - $0.77

3. From OP to ETH takes 1 minute and 30 seconds to complete the transaction—$11.42

In summary, the two-factor authentication model is in an absolute leading position.

（2）Chainlink

Committing DON collects transaction information. The target chain ARM will collect information from the source chain ARM to reshape the Merkle tree and compare it with the Merkle tree of Committing DON. After a certain number of nodes successfully ‘verify’, the transaction will be submitted to uting DON for execution. vice versa. Note: ARM is an independent system. **The technology used by Chainlink is 90% similar to the principle of Layerzero, both adopting the model of “collecting information + verifying information (verifying each transaction)”. **

The projects currently supported by Chainlink are Synthetix (cross-chain transfer of sUSD) and Aave (cross-chain governance voting). From a security perspective, although ARM and uting DON belong to two systems, they are both controlled by Chainlink itself and may be subject to self-theft. In addition, with the same technology, Chainlink will attract some old projects with in-depth cooperation to use this service to achieve bundling. And Layerzero will attract some new projects to deploy,** but from the perspective of supported network and ecosystem, Layerzero is better. **In addition, generally project parties also hope to deploy products to popular ecosystems.

2.3.1Layerzero Impossible Triangle

Security: There are four ways to transfer assets across chains

1. Lock/Mint: The cross-chain protocol will deploy fund pools in each network. When users want to transfer ETH from chain A to chain B, they need to lock the ETH of chain A and then mint the same amount of wETH in chain B. , when returning from chain B to chain A, wETH will be destroyed, and the ETH on chain A will be unlocked. The risk of this is that security completely relies on the cross-chain bridge. If the amount of Lock is large enough, hackers will definitely choose Attack the money pool.

**2) Burn/Mint: Tokens are minted in the form of OFT (Omnichain Fungible Token). A certain amount of tokens can be burned in the source chain and a corresponding amount of tokens can be issued in Mint of the B chain. This method can avoid the need for capital pool funds. The risk of attack caused by too much is theoretically safer. The OFT model is generally selected when the token is issued, which is conducive to the circulation between dapps. Old projects can also change their tokens to OFT, but it is difficult to implement because it involves the interests of many parties, such as how to deal with the native tokens in other dapps after the change, etc., so only new projects can adopt this model. In summary, there is no need to take risks for old projects, just follow the existing path of development, so if you choose security, you cannot apply it to old projects. **

3. Atomic Swap: The protocol establishes a fund pool on both chains to store a certain amount of tokens. When the user cross-chain, the user will deposit the assets into the A-chain capital pool, and the B-chain will withdraw the corresponding amount from the B-chain capital pool and send it to the user. In essence, it is one plus and one subtraction, and it can be deposited and withdrawn at any time, with a high safety factor. .

4. Intermediate Token: For example, 2.1 Thorchain will cause wear and tear, and the waiting time is too long.

At present, the most widely used one is Atomic Swap, but in the future, it must move closer to Burn/Mint mode to truly achieve zero-wear cross-chain and maintain security. One of the reasons why old projects are worried about using Layerzero is the price manipulation of oracle machines. There are many cases of oracle machines being attacked. The technology is not yet fully mature, so most protocols will choose a cautious attitude.

Audit: The verification parameters in Layerzero’s Relayer and Endpoint are set by the project party themselves, and there is a risk of malicious operations by the project party. Therefore, the audit is particularly strict, resulting in Layerzero not having many projects out of the circle. **If you give up auditing and let old projects use Layerzero, security will not be guaranteed. If security is chosen, it will be particularly difficult for new projects to pass the audit. **Through this, Layerzero still needs some time to develop.

2.4 Modular cross-chain protocol (AMB verification, the fourth type)

Connext is a modular cross-chain interoperability protocol. The modular structure is hub-and-spoke. The verification of Chain A and Chain B is handed over to the AMB (Arbitrary-Message-Bridge) of the respective chains—Spoke is Chain A&B, the generated Merkle tree certificate is stored on the ETH main network, and ETH is the hub.

This protocol has the highest level of security, because we believe in the security of the ETH network and use the principle of share security. If we use Layerzero technology, what we have to trust is the project itself, which is theoretically safer than the so-called double verification . **In the long run, some OP cross-chain protocols may have security issues, and the future trend will be towards ZKP or double verification mode. On the other hand, for security verification across native tokens, each chain uses its own AMB module for verification, and the transmission time of these verifications may not be consistent. Official AMBs usually take longer to verify, sometimes users may have to wait up to 4 hours or even longer for verification to complete. This may limit the scale of the Connext protocol in terms of overall economic benefits and widespread use. **

3. ZKP cross-chain interoperability protocol

The existing cross-chain protocol competition is already quite fierce. Many project parties have set their sights on ZKP, wanting to keep up with the concept of ZK roll up, using ZKrelayer, ZKlight-endpoint and other technologies, focusing on the highest security. However, the author believes that in the next 5- Within 10 years, it will be too early for ZKP to be applied in the cross-chain field and it will be difficult to compete with existing cross-chain protocols for the following reasons:

(1) Prove that the time and cost of generation are too high. Zero-knowledge proofs are divided into ZK STARK and ZK SNARK. The former generates a large proof but takes a short time, while the latter generates a small proof but takes a long time (the larger the proof, the higher the cost). Most ZKP cross-chains will choose ZK SNARK, because if the cross-chain cost is too high, no users will choose this solution. So how to solve the pain point of too long time? Some protocols will choose to add a ‘fast track’, similar to OP’s model, first pass the transaction, and then verify it, then this is not a ZKP in the strict sense, it belongs to the OP Plus version.

(2) High quality equipment requirements. ZKP has high requirements for facilities and needs to calculate a large amount of data and performance support. Once ZKP is used on a large scale, the computing power will not be enough. The agreement needs to spend a lot of money to purchase infrastructure, which currently has no economic effect.

(3) Technical iteration uncertainty. Among the several existing cross-chain protocols, the security of the double verification method is high enough to meet the current security needs. Although it may seem that ZKP is not needed now, future technology iterations may change this situation. Just like whether the third-tier cities needed to build elevated roads twenty years ago, there may not be a need in the short term,** but in the long run, ZKP may become the cornerstone of the development of the cross-chain field. ** Therefore, although it is not the time for ZKP, a team needs to continue to conduct research and exploration, and keep an eye on it, because the speed of technology development is unpredictable.

4. Summary and reflection

Cross-chain interoperability protocols are crucial to blockchain development. Among various cross-chain protocols, the two-factor verification model performs well in terms of security, cost, and speed, especially the two industry leaders, Layerzero and Chainlink. Although the technical implementation of the two is basically the same, Layerzero is richer in ecological construction and therefore currently has a more competitive advantage. However, Layerzero’s ecological development has been slow due to its security and audit mechanism, but I believe there will be more development opportunities in the future. As for ZKP cross-chain, although the current application is still relatively far away, its development direction is expected to develop in this direction, and we should continue to pay attention.

The author is optimistic about Layerzero and the cross-chain field, but also raises some potential problems. Most of the existing cross-chain protocols belong to L0 (transport layer), which are mainly used for asset transfer and information transmission (social, governance, etc.). In terms of asset transfer, the existing cross-chain bridges are all pseudo-cross-chain. Cross-chain in the true sense means that a certain asset is really crossed to another chain (Burn/Mint), rather than Lock/Mint or Atomic Swap, but if this is to be done, all existing old projects need to be overthrown , let new projects take their place, and the token issuance is an OFT model, but it is too difficult to realize and it will take a long time to transition. **

In fact, everyone still lives in a world that relies on “third parties”, and the chains are still closed. In terms of information transmission, each chain can rely on the transport layer for message transmission, but the current demand is not great, for example, the message transmission between Lens and Cyber requires cross-chain, but first of all, what is the social field? The development of scale is still a problem. Secondly, if most of the dapps are deployed in the Lens ecosystem, and the dapps themselves can communicate freely, then there is no need for cross-chains. Cross-chains are only large enough in a highly competitive environment. need.

From this, the topic of new threats to the Layer2 superchain is extended. For example, the success of the OP superchain will allow more Layer2s to use similar technologies to build, and they can seamlessly connect (assets). With the success of the blockchain in the future, OP and other roll ups will not be able to handle too many users and transactions, and will also spawn more Layer 2. The essence of seamless connection here is to share a settlement layer. In this way, the transfer of ** assets does not need to go through a third party, but the transaction data is obtained from the same settlement layer and verified in the respective chains. **Similarly, what the cross-chain protocol most hopes to see is that OP, ARB, ZKsync and Starnet compete with each other, and there is no obvious difference between high and low, so that the cross-chain can satisfy the transfer between these chain ecologies, otherwise, If a certain Layer 2 occupies 80% of the share, there is no need to cross the chain. But there are still many variables in the future. This is just the author’s own concern and will be decided in due course.