The need for a truly scalable cross-chan trading infrastructure

The recent series of collapses amongst centralized exchanges, lenders, and financial institutions have redirected the industry’s attention to the mission-critical nature of DeFi. It is clearer than ever that Web3 requires a level of systemic transparency that only DeFi protocols can offer.

As such, there is an ongoing exodus away from centralized custodians/trading venues that will place a new level of importance on cross-chain messaging and value transfer protocols, as they enable on-chain trading infrastructure to scale to meet heightened demand. Here, we present deSwap Liquidity Network (DLN), a secure and scalable new infrastructure for depthless, zero-slippage cross-chain value transfer.

Historically, all bridges have been built as liquidity protocols where all transfers are channeled through shared liquidity pools. This “continuously locked liquidity” model comes with numerous problems and trade-offs including:

  • The maximum transferrable amount is limited by the amount of liquidity locked in the pool on the destination chain

  • Unpredictable slippage, when users never know the exact amount they will receive from the liquidity pool on the destination chain, with their only recourse being to modify the “slippage tolerance” parameter

  • Reverted transactions (caused by other transfers processed before the user’s transaction achieves finality) resulting in slippage exceeding the specified tolerance parameter

  • Long time to finality, where the sender needs to wait (e.g. 256 blocks or 13min for transfers from Polygon) before the transfer is settled on the destination chain

  • Significant security and systemic risks born by liquidity providers (in case of ecosystem-level hacks, LPs of classical bridges can end up on the hook with bad liquidity)

  • If wrapped assets are used, users have to pay trading fees to AMMs and bear additional slippage and risk of MEV in order to settle transfers

  • Need for liquidity mining programs in order to retain locked liquidity

  • Scalability bottleneck: liquidity pools needed to be bootstrapped in order to add support for any new chain

To solve these problems, the design of value-transferring bridges needs to be reimagined from first principles with the following assumptions/attributes. Crucially, the new paradigm should be created on top of a cross-chain messaging infrastructure that is compatible with the existing DeFi ecosystem. Since cross-chain infrastructure is asynchronous by nature, value-transferring protocols should work asynchronously as well, avoiding any liquidity pools so that instead of bearing continuous risks, users are exposed to minimal risk solely at the time of settlement.

With DLN, the paradigm is shifted from the model of “continuously locked liquidity” to “liquidity on demand”, designing a new architecture that enables high-performance trading of any amount of liquidity with zero slippage and without the need to have any TVL, solving all the issues of classical interoperability/bridging protocols.

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