Cross-chain DeFi refers to a financial application ecosystem that exists between multiple different blockchain ecosystems, and can seamlessly exchange data and tokens between each other.
The Web3 ecosystem has become multi-chain , with decentralized applications thriving across hundreds of blockchains, Layer 2 networks, Appchains, and other environments. While the launch of a diverse blockchain ecosystem has pushed trust minimization to become the new norm, it has also led to fragmentation of assets and applications across different environments.
Cross-chain DeFi is a new decentralized financial paradigm supported by cross-chain interoperability, which enables fully cross-chain applications to seamlessly exchange messages and tokens between different networks.
This article provides an overview of cross-chain DeFi, how it works, and how Chainlink CCIP can help developers participate in this new wave of cross-chain innovation.
What is cross-chain?
First, a brief explanation of why cross-chain interoperability is a critical missing piece in DeFi and the blockchain economy. Blockchains themselves do not have the ability to communicate with external systems, which makes them unable to communicate with other blockchains and existing Web2 infrastructure. Given the wide diversity of the blockchain ecosystem, with hundreds of blockchains already in operation and many more likely to be launched in the future, it is critical that these chains be able to interoperate and communicate with each other of.
Cross-chain interoperability protocols are the key infrastructure for exchanging data and tokens between different blockchains. Cross-chain interoperability makes the Web3 ecosystem more integrated and makes the connection between the existing web infrastructure and the Web3 economy closer.
Without cross-chain interoperability, each blockchain would be an isolated island, unable to share resources or information such as assets, applications, and market liquidity with the rest of the ecosystem. Cross-chain technology helps create connections between these islands, enabling interoperability for applications and creating a more unified liquidity environment.
Limitations of DeFi
DeFi offers great potential for building a financial system based on cryptographic algorithms without conflicts of interest. However, the lack of strong cross-chain connectivity and interoperability makes realizing this vision difficult. In the DeFi field that lacks cross-chain technology, the main challenges include:
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Restricted Liquidity - DeFi protocols have a very strong dependence on liquidity. When liquidity pools are siled across different blockchain networks, the ecosystem becomes fragmented and liquidity is scattered across different pools. The potential of DeFi lies in the creation of universal liquidity pools through standardized foundational elements such as exchangeable and non-exchangeable tokens. In the absence of cross-chain interoperability, liquidity remains limited to individual platforms, resulting in siled markets and hindered innovation.
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Isolated Assets - The siled nature of blockchain means that assets on one chain are isolated from those on other chains, creating a fragmented ecosystem that limits the adoption potential of DeFi while also preventing the creation of natively composable financial applications. In an environment with multiple different ecosystems, the liquidity of an application, such as an Automated Market Maker (AMM) , is dispersed across various blockchain networks. As a result, each deployment has less liquidity, causing traders to face greater slippage and reduced transaction fee income.
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Reduced capital efficiency - capital is restricted to different pools, meaning opportunities can only be sought in specific environments. Capital is constrained compared to access to a global pool of comprehensive liquidity, reducing market efficiency and preventing wider adoption.
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Limited Scalability - As applications are deployed in different blockchain environments, the scalability of the entire ecosystem is hampered.
How does cross-chain DeFi work?
The secure transfer of data, tokens, and messages between different blockchains enables the creation of cross-chain smart contracts - these smart contracts are created using multiple independent smart contracts deployed on different blockchains communicating with each other A unified application for decentralized applications.
Cross-chain smart contract design is an emerging field of innovation, and there are multiple ways it can be achieved. At a fundamental level, cross-chain smart contracts enable developers to divide applications into separate modular components that are deployed on different networks and perform different tasks, while remaining in sync and supporting unified use cases. This modularity enables developers to leverage the benefits of various blockchains within a single application; for example, using a highly secure blockchain to provide security while using a high-throughput blockchain for low latency.
Considering the current multi-chain ecological environment, applications are usually deployed separately on different blockchains, and cross-chain smart contracts can realize the interoperability of the same smart contract code deployed on multiple blockchain networks. This standardizes user experience in a multi-chain environment. Thus, these contracts not only address the shortcomings of the current multi-chain design paradigm, but also pave the way for entirely new smart contract use cases.
Advantages of cross-chain DeFi
A DeFi ecosystem supported by secure cross-chain interoperability has many advantages over the multi-chain design paradigm, including:
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Enhanced Liquidity - By unifying multiple disparate blockchain environments, liquidity conditions are improved as capital can tap into a wider pool of liquidity. Through cross-chain integration, capital is no longer limited to different networks. This bridges liquidity gaps, making markets more efficient and reducing transaction slippage.
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Increased Capital Efficiency - The ability to easily transfer assets between different chains allows for more efficient use of capital. This ensures that it can function across a wider range of protocols and applications.
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Increased Resilience - As resources and assets are distributed, the risk of single points of failure or targeted attacks is reduced.
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Enhanced User Experience - Secure and seamless cross-chain interoperability enables a future where end users may not even know which blockchain network they are interacting with. This user experience is similar to the traditional web experience, where users are often unaware of the underlying cloud infrastructure or backend they are using.
Types of cross-chain DeFi
borrow money
A cross-chain decentralized money market enables users to deposit collateral in a lending market on one blockchain and lend tokens from a market on another blockchain. Cross-chain lending allows users to keep their collateral on a highly secure blockchain while lending tokens on a high-throughput blockchain for use in applications on that chain.
Cross-chain money markets also help unify yields across different markets, enabling more complex hedging tools and reducing the cost of borrowing rates in illiquid money markets. Users can lend tokens from a market on a blockchain with a lower interest rate, and then bridge the loaned funds back to the chain the borrower started.
exchange
The cross-chain decentralized exchange (DEX) alleviates the liquidity fragmentation problem under the multi-chain design paradigm by providing users with trading functions to obtain liquidity in token pools on different blockchain networks. Therefore, cross-chain DEX significantly improves the accessible liquidity of all blockchain networks, provides users with lower slippage, and at the same time gives access to higher asset liquidity providers (LP) on each chain. fee.
Cross-chain DEX can also be designed so that users can exchange native tokens on one blockchain with native tokens on another blockchain without relying on Wrapped Tokens or centralized exchanges. Make an exchange . For example, users can exchange ETH on the Ethereum blockchain for SOL tokens on the Solana blockchain using a cross-chain smart contract.
Staking
Cross-chain staking allows users to stake assets on one blockchain and earn rewards on another, expanding the scope of staking as a mechanism for securing blockchain networks and Web3 services. By incorporating multiple blockchain environments into the design of the staking mechanism, the protocol can attract a wider range of capital and gain access to a larger user base.
yield aggregator
Cross-chain revenue aggregators can invest funds into various DeFi protocols that exist in the multi-chain ecosystem. This broader approach allows users to earn higher returns without having to manually bridge their tokens across chains. The cross-chain revenue aggregator can greatly reduce the friction of multi-chain revenue mining and eliminate the need for manual transfers, thus improving the liquidity in the multi-chain ecosystem.
The role of Chainlink in cross-chain DeFi
In order to meet the needs of safe and reliable cross-chain interoperability standards, Chainlink launched the Cross-Chain Interoperability Protocol (CCIP) to realize the seamless movement of data and tokens between different blockchain environments, and to integrate with existing interact with the web and enterprise infrastructure. By working with early partners such as Synthetix for cross-chain synthetic assets , and with Aave for cross-chain governance , CCIP is being widely adopted in the DeFi space to enable new cross-chain use cases and increase the adoption rate of smart contracts.
Chainlink's CCIP opens up a world of interconnected applications and new types of smart contract use cases.
CCIP is the most secure, reliable and easy-to-use interoperability protocol for building cross-chain applications and services. Developers can use the arbitrary message function to build their own cross-chain solutions on CCIP. At the same time, CCIP also provides a simplified token transfer function, enabling the protocol to quickly start in a controlled process without writing custom code. Token transfer between audited token pool contracts. CCIP also has other security mechanisms, such as custom rate limits on token transfers and an independent Risk Management Network (RMI) that monitors the validity of all cross-chain transactions.
CCIP is powered by Chainlink's decentralized oracle network, which already has an exceptional track record of securing hundreds of billions of dollars and facilitating over $8 trillion in on-chain transaction value . Since CCIP is built on top of existing Chainlink services, it requires few additional trust assumptions. If a dApp already relies on Chainlink's price oracles, then relying on CCIP for cross-chain interactions is an obvious choice.
CCIP has the potential to transform traditional single-chain or multi-chain applications into powerful cross-chain dApps for a variety of use cases including DeFi, NFTs, identity solutions, governance, and more.
If you wish to integrate Chainlink CCIP, please visit the product page . If you want to know more about CCIP's underlying architecture and code, please refer to the CCIP developer documentation .
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