Introducing Mosaic Phase 2
Transfer Availability Layer
Disclaimer: Information as of Jan 31, 2022. For the most recent updates, dive into our comprehensive documentation here.
The Mosaic, a transfer availability layer uses advanced liquidity management and Just-in-Time (JIT) liquidity bots to leverage a network of existing bridging infrastructure. As a result, it creates a next-generation chain-and-layer-agnostic asset transferal system that guarantees transfers, employs dynamic fees and efficiently rebalances itself ensuring scalable liquidity at all times.
Presently, the existing nature of bridges makes it infeasible for them to scale and meet increasing demand, whether from institutional or retail DeFi users. Bridges serve as critical infrastructure for communication between different blockchains. They enable the transfer of data, information, and digital assets across chains and layers. In very simple terms, the point of a bridge is to get from point A to point B, or even to some point Z. Certain characteristics such as the lack of smart liquidity movements and inability to support chain to chain transfer and swaps of LP tokens hinder bridges from accomplishing their role of asset transferal. Bridges remain crucial in the cross-chain future of DeFi but their limitations, such as the centralized approach to liquidity management, flatly defeat the ethos of decentralization. In principle, bridges should be trustless, but none meet this ideal.
This article explores the most pressing challenges and limitations bridges currently face, and then explains how Composable designed the Mosaic cross-chain liquidity layer to overcome the shortcomings of bridges, in part by proactively directing liquidity to where it is needed throughout different vaults and bridges within the ecosystems. Composable Finance is releasing Phase 2 of Mosaic, introducing three new paradigm modules that were developed to enable scalable liquidity, super-charging cross-chain transactions, asset transfers, and communication. These improvements and the continuous development of Mosaic positions it to go far beyond the capabilities of a simple DeFi bridge and keep pace with any increased demand or volume of cross-chain DeFi transactions.
Challenges and limitations with existing bridges
Upon examination of currently available bridges facilitating transactions for end-users, the design limitations that prevent users from effectively achieving their aims become apparent. Composable identified these limitations to pertain to their centralized framework and manual methods of communication and liquidity transfer. As a consequence, bridges are not able to scale to meet the growing DeFi demand.
The role a bridge plays cannot be fully realized without major supplementary technology that allows for the free movement of liquidity. At the core of their functional value, bridges need to be able to guarantee transfers. However, insufficient liquidity in a necessary layer at the time of request often hinders this guarantee. A major contributing factor to these limitations and failure of guarantee is the slow and manual process of liquidity movement. In order to service the increased volume of transactions that bridges facilitate, they need to be able to automate certain functionalities. Liquidity should be automatically rebalanced to ensure that it is available in the right layer at the right time to guarantee transfers. The inefficiencies of current bridges hinder end-users from harnessing the full potential of DeFi. For instance, arbitrage opportunities and other time-sensitive transactions may often fail as a result of the reactive method of liquidity movement utilized by the current generation of bridges.
Additionally, existing bridges can only accommodate small amounts often resulting in liquidity lags or not being available to support transactions of all users and all sizes. In most cases, high fees accompany transactions, as users have to compete to access the liquidity that is available. These limitations may have gone under the radar but not with the increasing complexity of cross-chain transactions. It is increasingly becoming an issue as transactions increase in quantity, size, and complexity, representing a future point of critical mass wherein DeFi growth has continued, yet these challenges linger. The lack of automated liquidity movement and the consequential lack of liquidity on an appropriate layer is a major limiting factor for bridges that are halting the widespread adoption of DeFi products and services. The current bridge frameworks need to be reimagined and improved to consistently and seamlessly route liquidity where it is needed, and support large swap transactions in a just-in-time manner.
Mosaic, Cross-chain Liquidity Layer
Composable Finance has developed Mosaic as a next-generation liquidity layer that acts as a chain-and-layer-agnostic asset transferal system and addresses the shortcomings of bridges. Mosaic aims to scale the capabilities of cross-chain transactions, to the point where institutions can successfully move their assets from chain to chain irrespective of size or volume.
For instance, if a user wanted to swap between 20M to 100M dollars from one chain to another, no bridge within DeFi’s landscape could quickly facilitate that transaction today. Composable recognizes that this is a huge problem, and to allow for higher volume swaps and enable growth in cross-chain and cross-layer space, there is a need for scalable liquidity bridging solutions that can dynamically rebalance themselves. Thus our aim is to build a bridge scaling solution, pioneering a scalable liquidity infrastructure that other bridges can tap from as it allows for the free movement of assets from chain to chain.
Module 1: Dynamic Fee Model
Mosaic has designed and implemented a dynamic fee model that has been proven to keep transaction fees low while returning significant yield to liquidity providers (LPs). Mosaic’s dynamic fee model is based upon the liquidity available on both the source and destination layers, in contrast to a fixed rate, which many other bridges have instituted.
Mosaic’s structure provides lower average fees for users and new yield farming opportunities that provide significant returns for staked users, even when single-sided staking occurs. Utilizing data from Mosaic’s proof of concept (PoC) and liquidity simulation environment (LSE), Composable found that the average users’ transaction fee was 0.32%, while LPs earned an 8.5% yield across ETH and all USDC-equivalent assets.
Using this data, Composable was able to refine our dynamic fee model and demonstrate that Mosaic could provide LPs with a 10% yield for passively staking. As new data enters the system through the use and growth of Mosaic, the fee model will be further refined through Phase 2, optimizing returns and decreasing the transaction fee.
Composable firmly believes that providing yield is a driving factor in a successful liquidity layer, and by incentivizing LPs to stake in the system Mosaic increase the efficiency of the infrastructure while simultaneously increasing the probability that a transfer request will go through.
Module 2: Passive Liquidity Allocation
In addition to providing LPs with significant yield, Mosaic’s fee model enables it to utilize other bridges’ infrastructure while creating liquidity forecasting models.
Another important layer on top of Mosaic sets out to address the challenge of maintaining or rebalancing liquidity in vaults. Composable has built and tested sophisticated forecasting models so that no vault is ever without liquidity, and so that normal operations and requests are consistently facilitated. The goal is for every vault to have enough liquidity at the required time to guarantee requests can be fulfilled.
Composable designed Mosaic to enable liquidity to automatically move to where it is needed to facilitate and guarantee transactions. The movement of liquidity is automated through forecasting methods that are outlined in a series of research articles released by our team and spearheaded by 0xbrainjar. You can read more about how Mosaic achieves passive rebalancing from 0xbrainjar’s several articles below:
- Liquidity Forecasting in Mosaic
- Liquidity Forecasting in Mosaic: Part II
- Liquidity Forecasting in Mosaic: Part III
- Liquidity Forecasting in Mosaic: Part IV
Module 3: Active Management
In Phase 2, in addition to Mosaic’s Dynamic Fee Model, and its passive rebalancing of liquidity through advanced machine-learning-based forecasting models, Mosaic introduces active management of liquidity through the use of high-velocity bots.
At the core of their design, active management bots solve a crucial need for the smart liquidity influx in cases of large transfer requests. With the limitations of existing bridges not being able to support large transactions, Mosaic’s active bots can intelligently detect transfer attempts and front-run the relayer with just-in-time liquidity, thereby guaranteeing the success of such successful transactions at all times. In doing this, this pits active management bots against passive liquidity providers. As active bots have the ability to front-run incoming transactions and in most cases settle them, they earn a higher portion of the fees as compared to their passive LP counterparts. This creates a sort of synergistic competition between these two thereby ensuring the constant availability of liquidity on the Mosaic bridge.
To explain this in a deeper context, it is important to note that the bots can still benefit from and utilize Mosaic’s passive rebalancing module. However, in addition, they can be programmed to provide Just-In-Time liquidity to help guarantee the success of transactions while capturing additional fees. These active bots power Mosaic’s liquidity movement by examining incoming transfer requests. When they identify that liquidity is needed for a pending transaction, they can provide that necessary liquidity to receive additional compensation.
For instance, a user holding USDC on Fantom, that provides his tokens as liquidity to the Fantom network through Mosaic, will have exposure to all the other networks that can interact with Mosaic. As such, the user gets multi-chain exposure that is unparalleled within this space. Additionally, this is a system that is easy for users to utilize as they can participate without the need to run a full node. Users can now benefit from otherwise unused collateral in wallets being used by active bots to provide liquidity and generate a return. The above highlights how bots can benefit all users, even those with little to no capital.
These bots will utilize the wallet directly to dynamically provide and withdraw liquidity without the need for personal interaction. As an example, a bot could run with a wallet that is holding $1000 USDC. If an opportunity arises, it will provide liquidity to capture generated fees and automatically withdraw at the time that has been configured. The bot will then provide liquidity for the highest optimal APY and will do all of the profitability calculations for a user. In essence, users provide liquidity to only one network, while the bot listens to the requests of all other networks. This method is also easily scalable as users can start another instance of the same bot on another network.
Powering Asset Swaps through Mosaic
Beyond the three modules that are introduced with Mosaic Phase 2 relating to asset transfers, there are additional functions that merit mentioning. Mosaic connects with external systems, such as AMMs, to allow users to directly swap tokens for whatever token they desire within the realm of supported tokens. To enable users to swap their tokens to access networks that they have not previously been exposed to, Composable has added a new feature to Mosaic, allowing users to receive part of the transfer in the native token of the destination layer. This will enable users to immediately start working in the network they are swapping into via their newly acquired native tokens.
Composable has created a user interface that sits on top of all the AMMs through Mosaic to allow users to interact with contracts and swap tokens as desired. Mosaic enables users to swap tokens without worrying about going to another protocol. This alleviates the complexity of navigating each AMM’s different interface. At the same time, Mosaic takes care of the complexity of navigating the AMM interface. For instance, a user that holds ETH on the mainnet, that wants to buy something on Sushiswap or Arbitrum, can now use Mosaic to swap for the desired token.
Mosaic’s unique ability to allow LP-native token swaps across chains and layers
To further help liquidity providers extract as much utility they can from their LP tokens, Phase 2 allows for seamless LP token transfers across chains and layers, a genuinely novel feature not currently seen on any of the available bridge infrastructures on the market. Liquidity providers will transfer their LP tokens from chain to chain, helping to deepen liquidity for DeFi apps offering better APYs at any instance. This feature of Mosaic is exciting because LPs do not need to burn the LP tokens to transfer from one chain and then mint on the destination chain; they can move their LP tokens natively — in their current state. This LP-native transferral feature is how Mosaic can power chain-and-layer-agnostic LPing — as adopted by yield-optimization protocols like Instrumental Finance. Mosaic also automatically recognizes that LP tokens are not created equal and accrue yield over time, handled without any intervention needed, more on that in the next paragraph. Instrumental Finance leverages this novel feature and is building on the Mosaic SDK. With this, LPs can easily migrate to any chain or layer offering a more attractive APY than they currently get and start accruing higher revenues there.
As a next-generation liquidity infrastructure that allows bridging assets, Mosaic Phase 2 provides a ratio for each token when users perform swapping functions. For instance, USDC on Fantom and Avalanche is 1:1, of course. However, this becomes useful for LPs transferring LP tokens from layer A does not need to have the same value on layer B for a reason mentioned earlier: LP tokens accrue yield over time as swaps occur in the pool. A good example is 1 Tricrypto on Chain A, which could be equal to 0.8 aTricrypto on Chain B, or 1 SUSHI wETH-USDC LP from L1 could be 1.4 SUSHI wETH-USDC LP on Avalanche. Phase 2 comes with advanced capabilities that can compute these differences on the fly guaranteeing each transfer gets the right amount of LPs (equal to the value the user initially locked on the source layer).
The Mosaic pallet
Mosaic’s imminent launch as a pallet on Picasso marks another milestone with ecosystem-wide growth implications. Presently, Mosaic connects EVM-compatible scaling solutions and the Ethereum mainnet — with the addition of Moonriver, a Kusama project.
This pallet will provide another gateway in Kusama to Mosaic’s larger network. Since Kusama has several parachains connected within its interoperable ecosystem, this pallet will also provide an access point for Mosaic’s EMV-compatible layers to the entire Kusama ecosystem. Beyond interoperability, Mosaic’s overarching liquidity layer allows users to tap into a variety of tokens that are natively available for use across different — and now connected — chains.
As a pallet, Mosaic will be leverageable within protocols and dApps on Picasso providing a much-needed liquidity layer. Substrate pallets can be used as lego-like building blocks stacked on top of new and existing infrastructure. This feature makes integrating Mosaic into projects a straightforward task for developers. Being able to leverage Mosaic — and all its Phase 2 functions — within protocol will bring forth a new generation of cross-chain protocols and dApps
Stay Connected and Join us
As the DeFi landscape continues to move towards widespread adoption which includes an increase not only in the volume but also in the size of the transfer and swap requests, Composable Finance is constantly reimagining the functionalities that the different parts of its ecosystem can provide. Composable aims for full interoperability and true integration of necessary primitives, such as the bridges that facilitate communication across layers and chains. Mosaic is a prime example of how Composable Finance is changing the landscape of DeFi possibilities through rigorous research and innovation.
Mosaic and its constant evolution are moving towards actually enabling the cross-chain environment that we have envisioned and forecasted from the inception of Composable. Mosaic is a key piece that does not only benefit our ecosystem but is being built into a collaborative juggernaut that unlocks the true potential of interoperability to establish a blockchain agnostic ecosystem that is primed with potential for the adoption of not only DeFi applications but institutional involvement through TradiFi convergence. We are thus continuing our development to further allow for the free movement of assets without restrictions such as lack of available liquidity.
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