When the “summer of DeFi” took off in 2020, decentralized finance held tremendous promise. An ecosystem of interconnected and permissionless peer-to-peer (P2P) financial pools would grant the underbanked access to global liquidity while mainstreaming the mechanisms once reserved only for hedge funds and institutional capital.
Fast forward to today, however, DeFi has a usability problem: It is mostly only available for the already wealthy, who can afford prodigious gas fees to interact with smart contracts on low-throughput transactions—a far cry from the original promise of what DeFi could mean for the world.
Fractured Operation
Solutions to the high-fees due to the lack of scalability of Ethereum, the most popular smart contract platform, include next-generation, high-throughput blockchains and layer-2 designs that leverage technologies like zero-knowledge or optimistic rollups. However, both of these solutions have the same drawback: Value is fractured across multiple ecosystems that do not easily interoperate.
Moreover, smart contracts across these digital regions are not composable either, which is to say they cannot interact with each other well due to constraints that include, but are not limited to, the inability to communicate across blockchains that leverage different protocols and cryptographic signing primitives.
The ideal solution to unify these disparate blockchain networks and scaling technologies are oracles and bridges. Oracles are mechanisms in blockchains that can allow blockchains, which are otherwise closed-loop systems, to communicate with the outside world and to securely bring in data from the outside world into blockchains. Bridges are technologies that can allow blockchains to communicate with each other and are usually facilitated by nodes that run instances on both of the chains they are connecting in order to have visibility on both sides of the fence they are aiming to connect.
While oracles are utilized today to power some of the largest DeFi projects, including Aave and MakerDAO, with price feed data, bridges are utilized to create synthetic versions of native assets from originating chains and wrapping them onto destination chains that can actually be used within DeFi smart contracts. These technologies allow assets that may be staked or locked in smart contracts elsewhere to be furthermore put to work as collateral in order to generate even more yield in a trustless manner on a different chain than it originated! We’re entering an era where cross-chain DeFi will create ineffable capabilities that previously were impossible, giving investors and participants financial yields that are just not available anywhere else.
No Guarantees
However, serious issues arise when peering deeper into the security guarantees of bridging technologies—namely, the value that is bridged across chains is generally bottlenecked by the total bond or stake put up by the bridge nodes.
To drive home the point clearer: Suppose there are 100 nodes participating in a cross-chain bridge, which have each staked $100,000 each. The total amount of bonded stake is $10 million. Game theoretically, the amount of value that has been bridged by these node participants should be far less than the amount of stake these nodes could lose through slashing in the event they are caught trying to cheat.
In fact, since many bridging technologies leverage threshold cryptography, wherein at least half to two-thirds of the nodes must collectively sign to make a final decision, the amount of value that is bridged over with such a mechanistic design should actually be no more than 50 to 75 percent of the stake bonded.
Nonetheless, we routinely see bridges where there are literally hundreds of millions of dollars’ worth of assets bridged over by nodes that have a fraction of that amount staked, or worse, when the bridge is not decentralized, but instead is actually a small set of permissioned parties, which if colluded could wreak havoc.
This same general game theory problem is salient in regard to oracles as well. When the amount of value that is affected by the data that is underwritten by oracles in DeFi protocols far exceeds the value staked by oracle nodes (surprisingly some oracle services do not even require staking), you will have a very unstable system since an economically rational player may be more motivated to front-run, manipulate or delay the delivery of their oracle data in ways that benefit that node unfairly. These problems are exacerbated when value is splintered across small clusters of oracle and bridge node operators across multiple ecosystems who can easily coordinate with each other.
Toward the Solution
The ideal solution, instead, would be a much larger cryptographically secure network of decentralized node operators who have shared security and cryptographically secure means to communicate with each other and with other nodes across other networks. With a larger undivided pool of nodes collectively sharing in the security guarantees of both oracles and bridges, the vision for a seamless cross-chain economy can finally be realized. A high-throughput L1 with shared security across bridges and oracles will create the ultimate cross-chain DeFi stack, and that’s precisely what we’re working on at SupraOracles.com.
With core infrastructure composed of layer-1 capabilities, oracles and bridges at the center of the most popular blockchains, the multi-chain vision will be more fully realized. This will pave the way for new cross-chain applications and primitives that simply could not exist before an all-in-one solution that is cryptographically secure with fast finality was created. Value will move from chain to chain in a secure and transparent manner, and flourishing ecosystems and novel use cases will emerge. And this is why we are, despite the occasional pullback, bullish on the interoperability of the multichain universe—because we know that our solution is extremely secure and fortified by the cryptography of each chain we service.
Joshua Tobkin is the founder and CEO of SupraOracles, a powerful blockchain oracle that helps businesses bridge real-world data to both public and private chains, enabling interoperable smart contracts to automate, simplify and secure the future of financial markets.
