Defi started in 2020 and began adapting to a more multi-chain world after months of being Ethereum-centric. After the emergence of Binance Smart Chain in early 2021, attention shifted to various L2s. Most recently, we’ve seen the rise of L1s such as Solana and Avalanche. The development of these individual ecosystems showcased their own unique strengths — faster throughput, enhanced security, cheaper transactions, and more — while also demonstrating the need for cohesion and interoperability in the great Defi ecosystem.
Single-Route Bridges Dominate
Single-route bridges refer to bridges that connect two blockchains. They are often developed and maintained by the destination chain’s protocol and most of them share Ethereum as the common starting point. These bridges are often quick to develop because they don’t need to consider scalability and interoperability with other blockchains, and the design choice of these bridges makes sense given that Ethereum has the highest TVL. Examples include Polygon’s Plasma Bridge and Avalanche Bridge. However, users are required to pay high Ethereum gas fees when using bridges with the Ethereum network as the starting point. Alternatively, in a future where other chains are likely to displace Ethereum’s current dominance, it’s likely that users will not want to route through Ethereum.
Recently, multi-route bridges have become more popular. The common design for multi-route bridges includes a wrapped token at the destination chain. The downside of this design is that they often lack the support and usability of the wrapped token at the destination chain.
The above graph shows TVL across the top bridges over the last 6 months
Comparing capital inflow and outflow for the past few months provides interesting insights about the ecosystem. Amongst the top five most popular Defi bridges — Fantom, Arbitrum, Polygon, Optimism, and Avalanche — there is, on average, a slow stream of capital moving out of Ethereum along with days of massive outflows, most likely due to a new protocol or yield farming opportunity at the destination chain.
Note: Data from June 2021 — October 2021
Methodology: Bridge contract wallet Ethereum address analysis via Dune Analytics
Source: Etherscan, Solscan
Binance Smart Chain and Solana
Binance Smart Chain bridge started out as an ecosystem sponsored single-route bridge that connects Binance Smart Chain with other ecosystems but has since evolved into a multi-route bridge. Per the graph below, we estimate that there is around ~$500 million in daily bridge volume.
On Solana, the most popular bridging occurs via centralized exchanges. Users deposit their ERC20 or BEP20 tokens on centralized exchanges and then withdraw the SPL equivalent into the Solana ecosystem. Another solution is via Wormhole, which is a multi-route bridge that produces wormhole wrapped tokens. Looking at the graph below, we can see that the centralized exchange volume outweighs Wormhole’s volume.
Note: Data from June 2021 — October 2021
Methodology: Stablecoin creation/redemption hot wallet analysis on Binance Smart Chain via Dune Analytics, on Solana via TheGraph
Source: Etherscan, SolScan
Stablecoins are the backbone of the crypto ecosystem. Tokens are traded against stablecoins much more often than they are against other cryptocurrencies. This is reflected in the distribution of capital transferred via bridges. Looking at bridge volume over the past four months, stablecoins (including DAI) accounted for around 64% of all bridge volumes. This makes sense because different ecosystems have their own native tokens: Avax on Avalanche, Matic on Polygon, and so on. Hence, native tokens will account for smaller volume due to the lack of usability in other ecosystems.
When choosing which assets to incorporate in Swim’s liquidity pools, we will initially focus on stablecoin swaps, but we are looking to expand to non-stablecoin swaps and eventually to any native to native asset pairs. Below is a non-exhaustive glimpse of our future expansion plans:
Applications to Swim Protocol
Overall, here are some of the most important takeaways from this analysis and how we decided to incorporate them for Swim Protocol:
- Building a Defi Primitive: Single-route bridges are easy to build out but hard to scale. We want to build a product that plays a central role in the ecosystems we connect to.
- Real Bridge Demand: Our inspiration for Swim Protocol came from our own frustration with the current bridge design. From looking at bridge volume data, there is true demand for a comprehensive bridge solution that helps bridge native assets from one chain to another
- Stablecoin is King: Stablecoins are a crucial component of the crypto landscape. Swim manifests this from the start by initializing stablecoin liquidity pools to meet user needs. Eventually, Swim aims to achieve native asset swapping for any token, stablecoin, or otherwise.
Swim is a multi-chain AMM for native assets, designed to make bridging as easy as possible. Our protocol eliminates the need for wrapped assets by allowing users to swap from a native asset on one chain to a native asset on any other supported chain. Swim’s solution reduces the barriers faced by users when performing cross-chain transactions, enabling true interoperability between various blockchain networks.