The 2020/21 crypto market cycle taught us a lot about the behavior of new market participants and their preference for a low transaction fee environment, regardless of the underlying network's decentralization. The underlying layer-1 blockspace of Ethereum was inadequate to support the surge of new market players eager to speculate. Because of the shortage of blockspace, gas fees have remained persistently high, pricing the typical market participant out of speculative on-chain activities. This was the major driver of on-chain speculation and TVL flight from the Ethereum blockchain to other networks such as Binance Smart Chain (BSC), Solana, and Avalanche.

Ethereum TVL fell during the Layer-1 rotation trade in 2021. Aside from the speculative component of liquidity migration, it is critical to recognize that protocol-level innovation necessitates engineers developing new networks with new validator sets in order to verify and preserve the state of the blockchain. Given the arguments over consensus algorithms, execution environments, and chain factors such as throughput/node hardware requirements and finality periods, protocol-level innovation will continue. Given the above, we argue that the most significant infrastructure in the multi-chain paradigm is a bridge, or more generally, a generalized messaging system that allows for liquidity transfer and arbitrary messaging between a source and destination chain. Connecting EVM-compatible and non-EVM-compatible chains is included. The Interoperability vertical is one of the most difficult to comprehend due to the major emphasis on a security-latency trade-off that has resulted in some of the greatest attacks observed in the crypto asset class to date.

Below, we will discuss the significance of generalized messaging systems and how there is a larger total addressable market than liquidity migration, the significance of bridging given the rise of optimistic rollups and their 7-day finality period, and emerging generalized messaging systems such as Synapse Protocol and LayerZero.

TCP/IP

TCP/IP is a collection of core protocols that regulate how data is delivered across the Internet between network devices. The Transmission Control Protocol (TCP) specifies that data delivered over the Internet be conveyed in the form of packets that are correctly addressed, routed, and received. The TCP protocol laid the groundwork for device interoperability through the Internet protocol, allowing for the frictionless interchange of data at the speed of light across the globe. It is likely the single most significant protocol that underlies the contemporary world's interconnection.

Source: Rok capital

Similarly, the protocols that enable the new internet application layer known as 'Web3' need a protocol or collection of protocols that describe how these blockchain networks connect with one another. TCP/IP was defined by the permissionless flow of information. When it comes to the permissionless movement of assets and, more generally, communications across DApp instances on various chains, blockchains demand the same level of interoperability. The protocols that allow inter-network communication are known as generalized messaging systems, and they are expected to be the most essential infrastructure given continuous protocol layer development and Ethereum's rollup plan with segregated transaction execution environments. When considering the Interoperability Thesis, we often consider the following question:

If the TCP/IP protocol suite had a token, how would the market value it, given its colossal significance in the current world? The protocols that support the multi-chain concept of segregated blockchain networks follow a similar logic.

The Interoperability Thesis

The Interoperability thesis is supported by three pillars. These pillars are axiomatic statements that we are positive and are true to the greatest extent feasible. The following are included in the thesis:

Protocol layer innovation necessitates the establishment of new networks. This is still the basic principle that supports the multi-chain concept.
The Ethereum rollup-centric plan will result in various execution environments and the fragmentation of liquidity, which is now on layer-1. Optimistic rollups are the most prevalent and instantly scalable approach, although they have a 7-day finality period for asset withdrawal. As a result, bridging infrastructure that may avoid the required finality period will be in high demand.
DApps want to become multi-chain in order to reach a broader user base and enhance protocol income. The present multi-chain model includes several protocol instances spanning new chains, increasing the bandwidth needed for protocol maintenance, increasing attack vectors from the new execution environment/codebase, and fragmented liquidity, all of which have a detrimental effect on user experience.

To summarize, the Interoperability thesis is a confluence between the tautological reality that new networks will continue to be established when protocol-level innovation is necessary and the developing layer-2 thesis, which is the major method for scaling the Ethereum blockchain. Bridges are required for the permissionless transfer of liquidity from the source chain to the destination chain and vice versa. With the upcoming EIP-4844 update, we see optimistic rollups (ORUs) as the most instantly scalable L2 option. Bridges are the key infrastructure for bypassing the 7-day finality period for withdrawals when the liquidity and on-chain activities transfer to an ORU. L2s are also expected to become the major onboarding layer for the next wave of adoption. Finally, the developer experience of multi-chain deployments is time-consuming and fraught with technical issues that may be more efficiently addressed with a generic messaging layer for cross-chain communication. Based on the above, we consider generalized messaging protocols and their growing application layer to be one of the most promising new areas.

An Overview of Cross-Chain Messaging

A Cross-Chain Message's Life Cycle

To comprehend generalized messaging systems, we must first visualize how messages or arbitrary data are carried from the source chain to the destination chain and vice versa. As a result, let us use an example to describe the key steps:

Alice interacts with a DApp on the source chain, which is carrying out an activity.
This message is transmitted to off-chain actors known as Watchers, who subsequently validate its veracity.
The Watchers then use a dispatch transaction to send the message to the target chain.
The transaction is then received and processed by the destination chain from the source chain.
Alice's intended action is carried out and completed on the destination chain.

The Lock and Mint Design

A typical bridging approach is the lock and mint bridging model, which has been used by Wormhole for xAssets and Frax Finance for their 'Ferry Mechanism' of cross-chain FRAX/FXS. The following is the model:

The user will deposit x tokens into a smart contract on the destination chain, thereby locking the source chain asset.
A cross-chain message is sent from the source to the destination chain, informing it that x quantities of the token have been locked.
A smart contract on the destination chain then mints an equal quantity of the destination chain token.

This concept is also the cornerstone of the new LayerZero Omnichain Fungible Token standard, which maintains a constant total supply while enabling token holders to easily bridge their token holdings from each chain.

Cross-Chain AMM to Bridge Native Assets

Rather than using the lock and mint paradigm, which involves locking assets on the source chain and minting the equivalent asset on the destination chain. Actual liquidity of native assets may be used in an AMM model, where liquidity providers provide liquidity on both the source and destination chains, capturing swap fees and token inflation incentives as yield. This is a common bridging paradigm used by both the Synapse protocol and Stargate Finance, resulting in billions of dollars in cross-chain asset exchange transactions.

Security Models for Bridges

Bridges and generalised message systems are the single most crucial infrastructure in a multi-chain world, in our view. As a result, protocols must demand the greatest levels of security to prevent hackers from manipulating the system and jeopardizing vast quantities of money. Bridging vulnerabilities accounted for 50% of the overall value lost in all DeFi exploits, resulting in $2.5 billion in compromised assets.

Harmony: The Harmony Horizon bridge, which used a 2-5 validator system, was exploited for more than $100 million. That is, only two of the five individuals in the multi-sig system are required to be compromised. This is known as the M-N model, in which M participants must be compromised for an attack to occur. In a key management service, the private keys of the two multi-sig accounts were encrypted. The hacker obtained the encrypted private keys and decrypted them in order to exploit the bridge.

Ronin: The Ronin network attack was caused by compromised private keys, demonstrating the catastrophic weaknesses of multi-signature scheme bridge security models, which should be abandoned totally. The attacker acquired access to four private keys possessed by Sky Mavis executives and a third-party Axie DAO validator, allowing the signing of a fraudulent transaction that resulted in the theft of 173.6k ETH and 25.5m USDC.

Wormhole: A smart contract vulnerability let 120k ETH be stolen from the Wormhole bridge between Ethereum and Solana. The attacker used the complete_wrapped function to start a validator action approval, which was then signed and performed. The attack vector was essentially a faked signature, which resulted in a >$300 million vulnerability.

Nomad: Nomad's attack was caused by a smart contract vulnerability in which the trusted root value was set to 0x00 rather than their underlying message security. As a consequence, all communications were automatically confirmed, and $190 million was drained from the Nomad bridge.

The history of bridge vulnerabilities demonstrates the critical relevance of a bridge's security strategy in preventing the draining of bridge assets. particularly trusted configurations, such as the M-N multi-sig, have been found to be particularly vulnerable. The M-N model's goal was to minimize latency, which is why the bridges were used. Furthermore, we can observe that even with good security mechanisms, such as Nomad, attacks may still arise inside the software. On the contrary, any protocol that solves the security-latency tradeoff with a battle-tested codebase will become very important.

Optimistic Message Verification and the Synapse Protocol

In its present configuration, the Synapse protocol is a cross-chain AMM implemented on 15+ EVM compatible blockchains that allow for the bridging of both native cross-chain assets, such as stablecoins in stable swap pools and wrapped assets through the canonical token bridging. With its intuitive interface and deep cross-chain liquidity, the Synapse protocol has established a clear product-market fit, permitting over $36B in cumulative volume for 1.2m unique addresses.

For cross-chain swaps, Synapse Protocol provides historical analytics.

However, in its present incarnation, the Synapse protocol is only a basic liquidity layer that allows assets to be bridged through cross-chain swaps in their AMM instances. The newly suggested Synapse Chain architecture reveals a far deeper intention of moving to a generic messaging system that might serve as the basis for the next generation of native cross-chain apps.

The Synapse Chain

Synapse Chain is an optimistic rollup (optimism layer-2 fork) based on Ethereum that enables a single execution environment for multi-chain DApps by exploiting its innate optimistic message verification engine for verifying cross-chain communications. Synapse chains, like Optimism and Abritrum, draw their security from the Ethereum L1 while also enabling DApps to link to 17 different EVM-compatible layer-1 blockchains and Ethereum native layer-2 blockchains like Optimism and Arbitrum.

synapse architecture

EVM compatibility is likely the most essential feature of the application-level developer experience in Ethereum layer-2s, enabling the easy translation of protocols and developer tools. The synapse chain is fully EVM-compatible. DApps that are intrinsically cross-chain need several protocol instances, which has various drawbacks in terms of deployment and maintenance, as well as liquidity fragmentation, which impacts user experience. A single execution environment needs developers to install a single protocol instance while being linked to several layer-1 and layer-2 protocols. As an example, consider the following:

Consider Perpetual Protocol, a perps DEX. Each chain's protocol instances need a different set of liquidity providers. Optimism's liquidity depth may be substantially more than that of Avalanche, for example. As a result of the liquidity dispersion, avalanche traders will see increased slippage and worse price execution. As a result, instead of running many protocol instances, Perpetual Protocol may run a single instance on the Synapse chain, concentrating all liquidity sources while still reaching traders from 17 various chains using Synapse's cross-chain messaging mechanism.

Because Synapse Chain is a layer-2, the sequencer in charge of block building will be centralized at first. However, as time passes, the sequencer will decentralize, allowing SYN holders to collect protocol inflation and perhaps a share of the fees from layer-2 transactions. Aside from that, the security model used by Synapse for cross-chain communications will need a similar incentive structure to align the chain's security.

Optimistic Message Validation

Nomad pioneered the optimistic message verification security architecture for a generalized messaging system, which regrettably experienced an attack that drained about $200 million in cryptocurrencies. This vulnerability was caused by a mistake in which a zero hash was misinterpreted as a legitimate message, enabling transactions to be replicated and bridge assets to be drained. However, in terms of security-latency trade-off, the optimistic message verification model has shown tremendous potential in the development of a generalized messaging system and has subsequently been adopted by Synapse protocol in their new Synapse Chain architecture.

Because there is no such thing as a trustless bridge, the entities who authenticate cross-chain communications must be rewarded for being honest, which is how classic proof-of-stake consensus works. Many bridge security attacks resulted in M-N security models with M participants co-opted via social engineering or technical incompetence. There must be a better security architecture in the place where latency is not compromised to the point that it negatively affects application performance/user experience while maintaining the greatest level of security.

A group of off-chain individuals known as Watchers monitor cross-chain communications and identify potentially dangerous or fraudulent messages in the optimistic message verification mechanism. The security model gets its name from the same place optimistic rollups get theirs: cross-chain communications are presumed to be valid, and it's up to the watchers to flag and show that a message was malicious within the defined finality period. By requiring SYN to be bonded just like the PoS consensus, watchers are economically incentivized to behave honestly, and any malicious behavior is economically penalized by reducing their staked capital. The security of optimistic messaging stems from the notion that the system only requires one honest actor to function. In M-N security models, N participants must collaborate instead of M participants to co-opt the network. As a result, the security model functions on a one-of-N basis, making it very secure. The finality time is also much shorter than in classic optimistic rollups, which have a finality duration of 20-45 minutes.

1-N design

In their present state, multi-chain DApps are technically complex and cause several user issues, such as liquidity fragmentation. The trade-off between security and latency will always exist, but the generic messaging system that can maximize security while minimizing latency will acquire the greatest ecosystem. The Synapse protocol is positioned to be a leader in generalized messaging protocols, as well as in the optimistic rollup vertical, where it competes with Optimism and Arbitrum. The optimistic message verifications security model seems to be the best current model, needing just one honest actor and having a 0-minute finality period. We think that Synapse Chain will host a lively ecosystem of multi-chain DApps in the future, ranging from derivative DEXs to money markets, with value accruing back to SYN holders who participate in the delegated proof-of-stake consensus process.

LayerZero and Stargate Finance

LayerZero

LayerZero is a generic messaging system that allows arbitrary messages to be sent from a source chain to a destination chain. The protocol has already built a thriving application ecosystem, including a liquidity layer with Stargate Finance, a DEX with Trader Joe, and money market protocols like Radiant, all of which use LayerZero's cross-chain messaging design. The design is distinct from the optimistic messaging system outlined above. The LayerZero protocol works in the following way:

Endpoints: A LayerZero endpoint is located on each chain that is connected to the LayerZero network. Users may use these endpoints to transmit cross-chain messages using the LayerZero protocol, which guarantees delivery to the target chain.

Oracle: in charge of reading a block header from the original chain and sending it to the destination chain. LayerZero's oracle supplier is Chainlink, which is the industry standard oracle solution.

The Relayer: in charge of retrieving the proof for a certain transaction. DApps utilize the LayerZero relayer by default, but developers may create their own relayer to guarantee there is no collusion between the Oracle and the Relayer.

Source: LayerZero

The LayerZero protocol messages delivered from the source chain are only deemed legitimate if the related transaction is valid and has been committed on the origin chain. The messages comprise a unique transaction identifier, a global reference to the destination chain, the message that the user wishes to send to the target chain, and relayer parameters specifying which relayer the message should be transmitted via. Implementing LayerZero is quite straightforward in terms of developer integration.

When a DApp receives a message from the source chain, developers implement the lzReceive() method, which saves the payload of a message, each with its own unique counter. LayerZero's appealing generalized messaging system that currently hosts a lively ecosystem is due to the ease with which developers may add cross-chain message exchange. We anticipate that this tendency will continue for LayerZero in the future.

Stargate Finance

LayerZero's principal DApp is Stargate Finance, which works as a liquidity layer, permitting the frictionless transfer of native assets from a linked source chain to a destination network. There are now eight linked chains, including Ethereum's underlying layer-1, Optimism, and Arbitrum, as well as Avalanche, Fantom, and Polygon. The protocol charges 6 bps for every cross-chain swap, with 4 bps going to the protocol treasury, 1 bps going to veSTG stakers, and 1 bps going to liquidity providers, who are additionally rewarded with STG inflation incentives.

Stargate is primarily concerned with resolving the bridge trilemma, which analyzes the unavoidable trade-offs between immediately assured finality, native assets, and uniform liquidity. To elaborate, consider the following:

When a user successfully executes a transaction on the source chain, the requested asset will appear on the destination chain immediately.

Instead of wrapped assets, which need users to do extra activities on the destination chain, utilize native assets. Native assets, such as dollar-backed stablecoins or ETH, may be smoothly linked from one chain to the other.

To reduce liquidity fragmentation across chains, a single unified liquidity pool for native assets is employed, resulting in deeper liquidity and better pricing impact for native asset swaps across chains.

LayerZero and Stargate demonstrate that cross-chain communications are more than merely transferring money across chains. The overall potential market for generalized cross-chain communications, on the other hand, is substantially bigger, allowing a new sector of natively cross-chain apps that is not restricted to the bridging of assets across segregated blockchain networks. We may anticipate that generic messaging systems will be the essential underpinning for the future of multi-chain apps based on the first premise that DApps would pursue cross-chain deployments to maximize user acquisition and revenue.

Conclusion

Bridges are a subset of the broader generalized messaging thesis, which is more than just a liquidity layer between blockchain networks, but is the foundational bedrock for the multi-chain paradigm and the inevitability of cross-chain DApps, as outlined in the Interoperability thesis principle. Given the history of bridging attacks, security for these protocols is the most crucial aspect to consider as an investor. Given the security-latency tradeoff, we feel that the optimistic message verification approach is still the best choice. Furthermore, under an Ethereum rollup-centric future where optimistic rollups are prioritized for scalability, bridges will be critical in capital flow for avoiding the 7-day finality phase. As a result, as Layer-2s continue to rise, we may anticipate bridging volumes to rise as well.

Both Synapse Protocol and LayerZero have tremendous prospects in the generalised messaging infrastructure area, and we think both are destined to capture enormous upside, with the bulk of the market undervaluing how important the protocols are to the future of multi-chain DApps. We are really enthusiastic to see the Interoperability thesis come to fruition over the next adoption cycle.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name

The interoperability thesis: A deep dive into the bridge design