Unifying Cross-Chain Liquidity with Connext
The multi-chain market has arrived. Thanks to years of research, open source development, and the learn-in-public ethos of crypto developer ecosystems, we now find ourselves in the midst of heterogeneous L1 blockchains and L2 scaling solutions, each with its own scaling capabilities and design trade-offs.
With the proliferation of chains came demand for interoperability solutions. To date there are over 40 bridge projects, with $26B+ of value bridged so far from Ethereum L1 alone.
This represents less than 1% of crypto’s $3T market cap. As bridging infrastructure becomes robust, we can expect this percentage to be much higher as cross-chain liquidity becomes superfluid. And with ample room for crypto itself to grow (for comparison, the global equities market is $122T), the market for cross-chain infrastructure is likely to also be in the trillions.
Most bridging solutions today are either chain-specific, asset-specific, or app-specific. While they are effective near-term solutions to onboard Ethereum users to L2s, the true potential of crypto networks is unlocked when liquidity is no longer fragmented, and applications can be cross-chain native from day one.
Connext is well on its way to making this vision a reality. Connext is an interoperability protocol that enables fast, non-custodial cross-chain transfers and contract calls between EVM-compatible blockchains.
Connext is a liquidity network: an off-chain, peer-to-peer network of nodes (routers) that hold an “inventory” of assets on sending and receiving chains. Users transfer funds across chains by trading against a network of routers who have access to liquidity for the desired asset.
Users “lock” funds on the sending chain, and “unlock” the corresponding amount (minus fees) on the receiving chain. Vice versa, routers lock funds for the user on the receiving chain at the beginning of the transaction, and claim the locked funds on the sending chain in addition to fees.
The long-term foundational layer for cross-chain transfers should be maximally extensible, and highly secure as economic throughput skyrockets. Liquidity networks are great for this because they are:
- Trust-Minimized: Users are guaranteed that routers cannot run away with funds, thanks to the locking mechanism. Connext’s Non-Custodial Cross-Chain Transfer Protocol (NXTP) is the only generalised interoperability solution that does not add new trust assumptions. Bridges that rely on external validators are fundamentally less secure because users need to trust third-party verifiers with funds and data.
- Extensible: Bridges that utilize the chain’s own validator set to verify transactions have even stronger trust guarantees. However, they need to be custom-built for each chain pair and cannot quickly add support for new chains like liquidity networks can (for example, an Ethereum rollup bridge is only usable between that rollup and Ethereum L1). Connext can easily onboard new chains to the network, and thus scale quickly to other ecosystems.
- Capital Efficient: Bonded/insured bridging solutions require that validators stake collateral to perform services for the network. This collateral needs to scale proportionally to the bridge’s economic throughput or else the incentives break down. For liquidity networks like Connext, there is no game-theoretic upper limit on the economic throughput that the network can safely facilitate, as capital lockup is decoupled from the security model.
- Superior UX: Because verification happens locally in liquidity networks (between counterparties instead of requiring global consensus), cross-chain transfers are fast. The protocol is agnostic to L1 vs. L2 as long as the chain is EVM-compatible. Connext enables users to do direct, floor-is-lava L2-L2 transfers and avoid L1 transaction costs altogether.
These trade-offs place Connext at the sweet spot for cross-chain transfers and contract calls. Users are guaranteed that funds are safe, the network can quickly expand to include new ecosystems of dapps, transactions are fast, and mainnet fees can be avoided altogether.
Liquidity Rebalancing with Arbitrage Incentives
Cross-chain volume is a key growth indicator for liquidity networks. However, high volumes in one direction would quickly dry up liquidity on the other side.
To solve this problem, Connext prices liquidity dynamically on an AMM curve, mimicking stable-swap AMMs like Curve. The price of the assets move as a function of the ratio of available liquidity on each chain. The more unbalanced the liquidity, the larger this price difference.
In other words, users pay a higher price to get assets on a more liquid chain, and a lower price to get assets on a less liquid chain (In fact, it’s possible for a user to actually get paid to go on a less liquid chain if a router is unbalanced enough!)
This presents enticing arbitrage incentives for market makers, who already take advantage of such opportunities in AMMs like Uniswap. With Connext’s Virtual AMMs, it will be possible to perform cross-chain arbitrage as well.
A router auction mechanism matches users with the cheapest prices they can get for their desired transfer. The best prices, in turn, come from the most imbalanced routers. Virtual AMMs and router auctions together constantly rebalances liquidity across the network, allowing volumes to scale while maintaining cross-chain price equilibrium.
Furthermore, because counterparties negotiate route and pricing off-chain, it is impossible for third parties to frontrun the transaction.
Scaling Liquidity, Vertically and Horizontally
Connext becomes highly defensible as more routers come online and liquidity deepens across the network.
Today, over 100 assets have been bridged away from Ethereum to 17 different chains. There is ample room for new routers to target liquidity bottlenecks as Connext expands its ecosystem. Routers can find lucrative opportunities by identifying popular, but not yet liquid, routes and seeding liquidity for them.
Liquidity increases Connext’s capacity to scale the network horizontally and integrate more chains and projects. Integrations are enticing and sticky because it enables protocols to instantly tap into the wider ecosystem of users that are just one transaction away. This is where the extensibility of liquidity networks comes in handy, Connext can quickly respond to the demand for new chains and assets. Just 5 weeks after launching on mainnet, Connext’s NXTP has expanded to 9 chains including Ethereum mainnet, Polygon, Arbitrum, and Avalanche. This growing application and end-user base drives volume, which in turn drives router revenue and network value.
At the same time, Virtual AMMs and Router Auctions allow the network to scale vertically and facilitate ever-growing volumes. Volume presents arbitrage incentives which attract market makers to come in and keep the system in check. This mechanism also keeps the Volume-to-TVL ratio high. A high Volume-to-TVL ratio indicates high asset turnover and capital efficiency, which means high ROI for routers and low fees for users. Connext currently has $11M in liquidity and facilitating $31M in weekly volume.
These factors drive a liquidity flywheel that scales the network both horizontally (more chains and assets) and vertically (more volume, with liquidity constantly rebalanced by arbitrageurs):
A Foundation for Cross-Chain Native Apps
While being able to transfer between chains cheaply and trustlessly is powerful, we are only scratching the surface of what can be built on Connext. With more chain integrations and asset support comes the wider network of protocols on different chains, as well as cross-chain-native use cases which remain under-explored such as AMMs, yield farming, arbitrage, payment streams, with exposure to the best prices, yields, and lending rates across multiple chains.
NXTP is a base-layer protocol — akin to TCP/IP — that enables the most simple actions like cross-chain transfers and contract calls. It is a developer-facing infrastructure with an SDK that can be built on. The protocol can eventually be upgraded to more sophisticated communication between chains, depending on what other tools are available and what chains are communicating with each other.
For example, Li Finance is working with Connext to build a cross-chain DEX aggregator, which enables users to trade an asset without caring about what chain they are on, just that they are getting them at the best prices. Li Finance can plug into Uniswap on chainA, perform a swap, route liquidity through NXTP, and call Uniswap on chainB: the user swaps assets across chains without making a single on-chain transaction!
What’s in store for Connext
- Decentralising router provisioning and scaling liquidity. Connext is currently running a router pilot program, gradually onboarding new routers to ensure the protocol works as intended before rolling it out to the wider public.
- Decoupling liquidity provisioning from router operations. This will introduce a delegated staking mechanism in which liquidity providers can stake on routers and earn a portion of their fees.
- Integrating with other cross-chain infrastructure. Partnerships with other cross-chain infrastructure such as BWare (a decentralised API service for RPCs and subgraphs) will provide a richer toolstack for cross-chain native applications to build on the protocol.
- Supporting the next layer of the interoperability stack. With Connext as a secure, extensible interoperability layer, new protocols can build atop the protocol to add more functionality or optimise for more targeted user cases such as cheaper transfers and more generalisability.
The team behind Connext
We would be hard-pressed to find a team more qualified to work on unifying cross-chain liquidity than Connext. The protocol was founded in 2017 by Arjun Bhuptani, Layne Haber and Rahul Sethuram, who have since been a core part of the L2 research community, and built the first general-purpose L2 payment system using state channels in 2018. The current iteration of Connext is the product of these invaluable years of experience developing scaling and interoperability solutions.
Connext is actively hiring for both technical and non-technical roles including Integrations Engineers, Growth Marketing, and Developer Relations.
Head over to their Discord to learn more about integrating your chain or dapp with Connext, and apply for an ecosystem grant!
