The “semi-cross-chain” model of anchored assets has emerged in the DeFi field.
Original title: “From value transmission to value capture-the future of asset cross-chain”
Written by: Zheng Jialiang, Research Director of HashKey Capital
Asset cross-chain has gradually opened up hidden attributes with the development of DeFi. The real cross-chain has not yet taken shape, but the “semi-cross-chain” model of anchoring assets has emerged in the DeFi field. The underlying logic of the rise of cross-chain assets is that the supply of the native asset platform (Bitcoin) is separated from the demand of the open financial platform (Ethereum), and the supply of underlying assets is insufficient. The feasibility of the first generation of cross-chain asset verification channels and usage scenarios, and the second generation of cross-chain assets began to enrich their application scope. This article’s brief views on the cross-chain direction of assets are as follows:
- Due to the state of segmentation between blockchains, cross-chain assets are very necessary, and insufficient underlying assets will limit the development of DeFi
- Although the digital asset market is huge, due to the existence of various sub-ecology, the actual available assets are insufficient
- Asset cross-chain, on-chain native creation, and external asset on-chain are the three directions to solve asset shortages. At present, asset cross-chain has the most advantages
- Bitcoin, as the most consensus public chain, has become the preferred target for cross-chain assets, but the actual liquidity of Bitcoin accounts for only 20%, and it will become less and less.
- The four functions of cross-chain assets are mortgage assets, liquidity pools, derivatives subject matter and integration innovation
- Other public chains will also compete through cross-chain and Ethereum ecology
The significance of discussing cross-chain assets is that this is a way to directly financialize high-value, high-liquidity and high-recognition assets, and it is temporarily the most effective means, based on the following facts and judgments:
- Bitcoin will be the digital asset with the largest market value and the best liquidity for a long time, but it cannot carry complex smart contracts and cannot convert the asset market value into the bottom layer of the application.
- Large public chains such as Ethereum and Polkadot will gather a large number of applications, but the ecological mismatch, that is, developers are in other public chains, and most users are still Bitcoin users (including institutional investors who have recently entered the market). The threshold of directly using Ether or ERC20 tokens limits DeFi out of the circle
- Cross-chain assets or anchoring solve this problem and introduce the value of Bitcoin to other public chains. Reduce the user’s psychological migration cost, change the form of holding Bitcoin, but can participate in the application (such as gaining income).
- The endogenous asset creation of DeFi/NFT is another way, but the qualification and recognition of creating tokens is weaker than that of Bitcoin, and there is a lack of strong consensus
- The exogenous asset USDT is mainly used for trading, and the use of USDC is far inferior to WBTC. The realization of Security Token will take a long time
Asset cross-chain development
In September 2016, Vitalik Buterin’s report “Chain Interoperability” for R3 elaborated on the cross-chain technology path and application value. The recognized cross-chain technology is divided into notary mechanism, side chain/relay and hash lock Three categories. Application value is embodied in: asset cross-chain (Portable assets), atomic swap (Payment-versus-payment or payment-versus-delivery), cross-chain oracles, general cross-chain contracts (General cross-chain contracts) ). The difficulties of cross-chain technology mainly focus on heterogeneous cross-chains, and the consensus mechanism, security model, encryption algorithm, and block generation time are different on both sides. The specific cross-chain technology has been discussed in the market for a long time, so we won’t go into details.
Asset cross-chain is the primary application of cross-chain. The ultimate goal of cross-chain is to realize the sharing of information between all chains. However, due to the explosion of the application side (DeFi), the cross-chain assets made their debut in advance, and they did not even use the main cross-chain platforms Polkadot and Cosmos, but instead used Wrapped Token first. The model is operated through the smart contract model. WBTC is a representative of this type of anchored assets. In short, it is to deposit assets on one chain into a vault (centralized or decentralized), and the issuing agency will issue equivalent assets on another chain that are supported by another chain. . The reasons for this phenomenon are:
- The rapid development of DeFi requires underlying assets, especially those based on the ERC20 standard
- Cross-chain is a transit station, the purpose is to be used by Ethereum smart contracts, this is the most important feature, not the cross-chain technology itself
- The degree of decentralization is not the first consideration, the usability is the first. USDT/USDC/WBTC are all examples of this. They are centralized but available.
Maker introduced multi-asset mortgage, which opened a precedent for DeFi and cross-chain asset linkage. In November 2019, Maker added BAT and other digital asset mortgage loans in addition to ETH. In May 2020, WBTC was introduced as a mortgage loan self-asset. In January 2020, AAVE introduced WBTC, and in July 2020, Compound introduced WBTC. From our perspective, WBTC is mainly distributed in these DeFi contracts. Therefore, it is DeFi and liquidity mining that generate substantial demand for cross-chain assets.
The separation of asset platform and financial platform is the underlying reason for asset cross-chain
We define and classify native asset platforms and open financial platforms as follows. Native asset platforms refer to platforms that can generate encrypted assets. The largest is Bitcoin, and other public chains such as Ethereum. Open financial platforms refer to platforms that can execute smart contracts and run DeFi, such as Ethereum and Polkadot. Wait. We separate the two types of roles from assets and financial functions, and there can also be overlaps between the two:
Most platforms have both roles, but the reality is that Bitcoin, the largest asset platform, and Ethereum, the largest financial platform, are separate. If the role of the native asset platform and the open financial platform must be required to be unified, it will hinder the growth of DeFi to a certain extent. If you take Ethereum as an example, DeFi has developed to the present, and the Ether (packaged as WETH) that is really used for the underlying assets Only 4.65% of Ethereum’s total supply (about 5.3 million, half of which is used for Maker), is about 6.1 billion market capitalization, which is only about 65% higher than the market capitalization of WBTC.
If you want to increase the available assets of the financial platform, there are currently three main ways:
- The first is cross-chain assets, introducing large market capitalization and high liquidity blockchain native assets.
- The second is to introduce external assets, the so-called assets on the chain, such as the US dollar (turned into a stable currency), or the token of securities (in the future)
- The third is direct asset creation on the chain
We can see that with the rise of DeFi, the underlying assets have indeed come mainly along these roads: WBTC is basically used for DeFi, and the exogenous assets USDC and USDT used a total of 1.43 billion in DeFi. Cross-chain assets are currently the most important source of underlying assets in addition to the native asset Ether of the open financial platform Ethereum.
The third path is to directly create assets, that is, create assets directly endogenous to the open financial platform, such as DeFi and NFT:
- We have observed that DeFi is similar to traditional financial agreements in that DeFi itself not only creates financial instruments, but also creates financial assets. For example, Maker created both a lending agreement and a stable currency Dai, as well as a governance token MKR. Synthetix has both synthetic product agreements, platform tokens SNX and S assets (synthetic assets) and i assets (reverse assets). But the path is different. Traditional finance is based on the underlying assets, such as loans, equity, etc., to create a layer of equity in the upper layer, and it is strongly bound with assets. The assets created by DeFi may not be limited to a certain agreement or only expressed as a governance right without direct economic attributes (relying on consensus).
- The same is true for NFT, which can also be used to create various assets natively, such as game props, encrypted artwork, social token, etc. NFT assets were also quickly used in DeFi. NFT assets are closer to direct creation rather than based on an agreement. In the future, there will be more other types of Dapps, all of which can be directly generated through ERC20 or ERC721.
However, the problem with DeFi/NFT native assets is that the consensus is weak, volatile, and inconvenient to use. For example, Synthetix’s synthetic assets require SNX to be used for 700% over-collateralization, which results in low capital efficiency, or conversely, liquidity discounts and The risk discount is high.
To develop DeFi, it is inseparable from the opening up of assets (the internal transfer path is smooth) and the use of external assets. From the perspective of the three ways to increase available assets, cross-chain assets have good scalability and high acceptance, and their significance to DeFi is the same as that of USDT relative to centralized exchanges.
Four uses of cross-chain assets in DeFi
Let’s take WBTC as an example to use simple statistics to see what cross-chain assets have done in DeFi. At present, the supply of WBTC is about 112,000. According to our statistics, the top 50 addresses are mainly distributed as follows (January 21, 2021):
Mortgage assets
Mortgage assets are mainly used for lending agreements, which is also the main purpose of WBTC. At present, about 50% of WBTC has three major lending agreements Compound, AAVE and MakerDao
Provide liquidity
In the DEX field, WBTC is mainly a pool that provides liquidity, which has accelerated after the rise of liquidity mining.
- For example, the WBTC/WETH pool of SushiSwap provides liquidity, about 8,400 WBTC, and the WBTC/WETH pool has a liquidity of 620 million, accounting for about 1/3 of the total pool of 2 billion, which is much larger than the 220 million of SUSHI/ETH.
- Such as providing liquidity in the RenBTC/WBTC pool of Curve, about 5330 WBTC
Provide the underlying subject of derivatives
This use has not yet started. Although the market is very optimistic about the development of on-chain derivatives, the market scale is small. From the perspective of limited projects, the decentralized options platform Hegic/Opyn/Auctus has constructed an option pool based on Ether and WBC.
Options have more exercise days than futures, which makes them more complicated and require a liquid subject matter. The options market has been developing for so long, but it is mainly BTC and ETH, because the underlying liquidity of other assets is indeed not good.
Converging innovative applications
Badger Dao provides us with an idea. Badger introduced Bitcoin to the DeFi ecosystem of Ethereum, but unlike other cross-chain assets, it is not satisfied with just making the asset transmission channel, but continues to derive more based on this DIGG (the BTC token it issued) Multifunctional, DIGG itself is not a complete pegged token, but a flexible token with rewards (imitating AMPL). Other interesting features include:
- DIGG will allocate rewards to DIGG Set (one of Badger’s machine gun pools) based on price changes
- DIGG can be deposited into Uniswap and SushiSwap together with WBTC for liquidity mining
- BTC interest-bearing token bBTC
- Generate WBTC/RenBTC from native BTC package
- One-click deposit into the machine gun pool function Zap
BadgerDao further opens up the application space of cross-chain assets, and various imaginative applications will be developed, especially the cooperation with other DeFi contracts and the coverage of it by decentralized insurance (TVL has exceeded 1 billion US dollars). It is estimated that there will be many imitation disks, which will further stimulate the industry to fully explore the application potential of cross-chain assets. Due to the scarcity of cross-chain assets, future contracts will rely on more scenarios to compete for them.
Classification of assets across chains
Cross-chain assets can be classified into centralized, decentralized, and semi-decentralized according to the classification of the issuer. The centralized issuance mechanism is similar to USDC, relying on the reputation of custodians and real-name merchants. Andre Kang once summarized a picture:
According to the principle of issuance, it can be divided into anchor type and direct cross-chain. At present, anchor type is mainly used. Smart contracts can be controlled. Direct cross-chain is more complicated, and the ones that are online are basically testnets. In essence, a centralized exchange can also be used as a cross-chain type, but it lacks atomicity and needs to trust a third party, so there is still market space for direct cross-chain.
Anchor assets
WBTC
WBTC is a centralized issuance mechanism, the principle is very similar to USDC and other stablecoins, except that BTC is the mortgage. There are four roles in the coin minting process of WBTC: custodian, merchant, user, DAO member
- Custodian-keep the original BTC, currently only BitGo
- Merchants-used to print or destroy WBTC, and carry out WBTC circulation
- User-Ordinary user of WBTC, same as other erc20 users
- DAO members-members used to control the list of custodians and merchants, using multi-signature contracts for management
The issuance and destruction of WBTC are all initiated by Merchant. Merchant interacts with the wrap token protocol, and deposits (mint) or withdraws (burn) BTC from the custodian, and obtains or destroys WBTC. Customers who have passed kyc/aml can Purchase WBTC from Merchant or redeem BTC.
Boring Dao
Boring is a DAO-based asset cross-chain platform. In the form of DAO, public chain assets such as BTC, XRP, BCH, EOS, ZEC, DASH can safely, privately and freely enter the blockchain network in the form of bToken (an ERC-20 Token) and seamlessly access Existing DeFi pool. At the same time, a series of underlying mechanisms such as tunneling mechanism, coin mining, and Boring Farming have been designed to enable bToken to quickly achieve a cold start and solve the problem of cross-chain asset liquidity. As a governance token, BOR can operate safely, decentralized, and efficiently.
Alaya
PlatON testnet Alaya also officially released a cross-chain system for financial infrastructure assets in December 2020. The Alaya cross-chain system can allow users to directly anchor Ethereum assets, such as Ether and USDT, to Alaya.
RenBTC
RenBTC is a relatively decentralized model for anchoring assets. It used to be a trading dark pool at the beginning, and later transformed into a cross-chain asset. The user deposits BTC into the RenBridge gateway to mint RenBTC on Ethereum. RenBTC’s protocol runs through a decentralized network called Darknodes, using technologies such as Shamir’s secret sharing and MPC. The main difference between WBTC and RenBTC is that anyone can mint coins on RenBTC, not just merchants. However, RenBTC’s degree of decentralization will have been questioned. The current RenBTC issuance is second only to HBTC and WBTC.
Other decentralized projects include tBTC, pBTC, etc., with similar basic principles.
Cross-chain
Thorchain
Thorchain realizes the direct exchange of assets through direct cross-chain transactions. The industry analogy is the cross-chain Uniswap. And there is no need for permission and no hosting. Because Thorchain is a cross-chain asset exchange pool, it can be used as an exchange layer for anchored assets. For example, BTC is converted to WBTC, BTC is converted to RenBTC, and the token Rune acts as the settlement currency in the middle. Therefore, Thorchain can also be used as an aggregator of cross-chain assets, that is, in addition to the first issuance of WBTC and RenBTC (that is, the above or certification node issuance), Thorchain can also be used for secondary issuance in the market. Thorchain currently only launched the cross-chain transaction protocol Asgard, which supports the exchange of BTC and three assets on the Binance Chain (BNB, AWC, RUNE). Earlier, BEPSWAP, an automated market maker based on Binance Chain, was launched, which is equivalent to Uniswap on Ethereum.
Kava-Hard protocol
Kava launched Hard Protocol in 2020, a Kava-based cross-chain DeFi protocol that supports the cross-chain of Bitcoin, Binance Chain and Ripple. On October 15th, the upgrade of kava 4 Gateway launched Hard Protocol simultaneously. In addition to cross-chain, assets such as BTC, XRP, BNB, BUSD, KAVA and USDX can all be borrowed and mined. In early 2021, Kava will be launched on Kava 5, and the V2 version of Hard Protocol will be launched at the same time.
Near-Rainbow Bridge
Near launched the Rainbow Bridge in September 2020, a cross-chain interoperability bridge that can realize the cross-chain flow of assets on Near and Ethereum. The user does not need to trust anyone, only the decentralized client, so it is also trustless cross-chain.
Since Near and Ethereum are both Turing complete, both sides can track the movement of assets on the other chain. The realization of Rainbow Bridge has some prerequisites:
- Near hopes that Ethereum will pass EIP665, but before it passes, users can only believe that it is impossible for the gas fee of each block to increase by more than 2 times within four hours. However, it may be difficult to pass EIP665.
- Whenever 2/3 of the nodes on Near are honest.
Near is still being tested on the Ethereum testnet Ropsten and Near testnets, and has not yet been opened to the public. There have been some native projects, which are still relatively early.
Blockstack2.0
BlockStack updated the latest mainnet 2.0 version in January 2021, namely Stack2.0. Blockstack is a project that is strongly tied to Bitcoin. At the beginning, it used Proof of Burn as a consensus. 2.0 Changed the consensus mechanism and uses Proof of Transfer. Miners can deposit BTC as a kind of interest-increasing underlying asset into Stack and get token STX. Stack2.0 is equivalent to implementing the application layer for Bitcoin. Not only can cross-chain assets be realized, but also more applications can be made around hurdles, similar to a Layer 1.5.
Moonbeam
Moonbeam wants to directly reproduce the development environment on Ethereum on Polkadot, which is a larger application than asset cross-chain, and it is a direct ecological “immigrant”. All protocols and applications can be reproduced on Polkadot through Moonbeam, not just the migration of assets, but the recurrence of assets, such as AAVE on Ethereum, which becomes pAAVE on Polkadot. All this depends on the development of Moonbeam parachain.
Cosmos
Of course, the most powerful asset cross-chain still hopes to achieve heterogeneous cross-chain in Cosmos and Polkadot. On January 28th, the upgrade of Cosmos “Stargate” was carried out. The Cosmos SDK v0.40 has been released. The IBC module will be implemented, but the usage is unknown.
Synthetic assets
Synthetic assets can also be counted as a type of cross-chain. Most synthetic assets do not create assets out of thin air. They create credible assets by collateralizing part of their assets. In essence, over-collateralization also reduces liquidity, such as Synthetix. Synthetic assets do not necessarily cross-chain directly, but can mortgage cross-chain assets and use cross-chain asset upgrade functions.
Badger Dao
BadgerDao is a decentralized organization that also hopes to bring Bitcoin to DeFi and has designed a series of functions around BTC. The current three products are the decentralized governance organization, the machine gun pool Sett (aggregator) and the Bitcoin-based flexible linked asset DIGG. In addition to DIGG, Badger will also launch bBTC, an interest-bearing asset based on BTC.
The total amount of DIGG is constant, 4000 (adjusted from 6,250), 600 in circulation, and the price is adjusted according to the Amplforth mechanism. Strictly speaking, DIGG is a synthetic asset. However, synthetic assets also have advantages. For example, cross-chain assets take constant price (stable peg) as the first priority. Synthetic assets, especially those with elastic supply, can be matched with features such as airdrops, liquidity mining, and price adjustment mechanisms. It will also be adjusted through the allocation of the machine gun pool. BadgerDao’s happy cold start and diversified products have also caused its lock-up volume to increase rapidly. But strictly speaking, DIGG is more like a very pure “creation out of thin air.”
Cross-chain asset competition and outlook
The main competition comes from the competition for underlying assets
Supply side:
- The competition of cross-chain assets lies in the competition of open financial platforms for asset supply platforms. Bitcoin’s deflationary nature will lead to increasingly scarce. And as the Bitcoin store of value narrative is accepted, scarcity will become higher and higher. Glassnode has calculated that 78% of circulating bitcoins have low liquidity, and the proportion will become higher and higher (in 2020, one million btc will become low liquidity).
- Each public chain will match the cross-chain asset agreement. Whether it is native or based on smart contracts, other assets that can be replicated safely and efficiently will be supported by the public chain, such as Near Rainbow Bridge, Moonbeam on Polkadot, Ethereum WBTC, RenBTC, etc. on the Internet.
- Of course, as we said before, the supply of DeFi or NFT’s native assets and external assets will ease the pressure on the supply of assets in the chain, but due to issues such as consensus, credibility, and recognition, one dollar of BTC and one dollar The utility of other assets is completely different. (Such as whether it can be accepted as collateral, the level of excess mortgage rate, the liquidity discount and premium under large-scale liquidation, etc.)
Demand side:
- The cross-chain completed the means, and the demand mainly lies in the application, such as DeFi, NFT, and games. Ethereum is still the number one destination for cross-chain assets.
- The faster DeFi develops, the liquidity is divided into more small pools, and the launch of Layer 2 will intensify the desire for liquidity. DeFi itself eliminates liquidity. Due to the over-collateralization and liquidity pool mechanism, the demand for underlying assets has doubled.
- Competition will be diversified. Gimini has also considered introducing Filecoin into Ethereum. The increase in asset aggregation on the open financial platform will cause a siphon effect, and the strong will remain strong.
- Asset cross-chain assessment mainly balances safety, efficiency, and economy, as well as the measurement of various explicit and implicit costs.
Outlook
- Although it was generally believed that cross-chain is not very useful and that centralized exchanges can achieve cross-chain, after the emergence of DeFi mining, cross-chain assets become a must.
- The existence of native applications on the chain allows assets to find a place for cross-chain. The scale of open finance is not only related to the overall market value of encrypted assets, but also related to freely circulating encrypted assets.
- The underlying assets of the open financial platform are not necessarily the largest, but they need to have strong executive functions and security mechanisms. The lack of assets can be solved through asset cross-chain.
- Realizing cross-chain or realizing asset issuance does not necessarily make a public chain stand out, just like before DEX, no matter how good assets are, they will enter CEX. CEX captures the most value, and the fee income is higher than the cost of on-chain transactions. income.
- At present, only BTC and ETH are really needed to achieve asset cross-chain. In the future, with the ecological improvement of other public chains, multi-chain cross-chaining will become a necessary function.
- The first-generation model of cross-chain assets is basically finalized, that is, to be a safe and efficient channel. The second generation has begun to open up the application scenarios of cross-chain assets.
