Modular blockchains could be the next hot crypto market trend in 2023

The public blockchain sector has grown from less than a few million dollars over the past decade to a $1 trillion industry. However, one thing that has yet to be decided is a decentralized and secure interoperable solution.

Let’s take, for example, Ethereum (ETH) to Bitcoin (BTC), the largest blockchain network. To date, centralized exchanges are the only viable solution for moving from one network to another.

Centralized solution provider BitGo provides Ethereum users with the largest liquidity pool to access BTC via Wrapped Bitcoin (WBTC). BitGo IOUs account for over 93.6% Bitcoin is bridged to Ethereum. Users must rely on BitGo partner platforms such as centralized exchanges or CoinList to exchange BTC and WBTC.

The dominance of the WBTC exposes it to obvious risks of centralization and regulation. RenBTC, a platform operated by Alameda Research, broke up in December after the FTX crash, and the same could happen to BitGo. The recent regulatory backlash against Paxos for issuing a USD-backed BUSD token could also eventually land services like BitGo under the US SEC’s eye.

It is also necessary to develop interoperability between smart contract platforms and other blockchains for specific applications. Sidechains and rollups in Polygon (MATIC), Arbitrum and Optimism account for 90% of the Ethereum bridge volume. The Near (NEAR) Rainbow and Fantom (FTM) bridges are the only independent blockchains with a noticeable total value locked (TVL) on Ethereum bridges.

Ethereum share of the bridge market from TVL. Source: Dune

Several major crypto projects such as Polkadot (DOT) and Cosmos (ATOM) have implemented modularity from the ground up to create a secure and scalable cross-chain platform, with the ultimate goal being to create an interoperable “web of networks”. However, Cosmos has yet to attract sufficient liquidity to its ecosystem, and Polkadot continues to grow.

Bridge centralization problem

The 2021 hype cycle has witnessed the emergence of a “multi-chain future,” in which various blockchain host-specific functions are similar but merged together through interoperable solutions. The first generation of bridges were very primitive and centralized, which eventually made them hot targets for exploits.

The next generation of interoperable solutions operate as separate blockchains, enabling decentralization and increased security. These include intermediate transfer tokens such as RUNE Thorchain. However, the daily volume of transfers through Torchain remained below $20 million, suggesting that it was unable to increase usage.

Thresholdwhich provides an untrusted and private portal for Bitcoin on Ethereum, will be launched in the first quarter of 2023. It will seek to replace centralized providers such as BitGo in providing liquidity between Bitcoin and Ethereum.

Some other protocols are focused on interaction between smart contract platforms.

LayerZero is an omnichain interoperability protocol that allows the development of applications such as DEX and lending protocols on top of it. These protocols can interact with monolithic chains such as Ethereum, Cosmos Hub and Solana. Stargate is the first DEX built using LayerZero and has $324 million in liquidity in Ethereum, Polygon, BSC and Avalanche.

Celestia is a level 1 blockchain built using the Cosmos SDK. The platform supports the execution of smart contracts, but is only responsible for sequencing transactions and making blockchain data more accessible.

It aims to act as an intermediate layer between Ethereum rollups and the mainnet, compressing rollup data for faster execution at Ethereum layer 1. Celestia does not validate block data, but helps optimize gas cost and execution speed. This capability will extend to Tier 1 blockchains such as Cosmos, Solana, and Avalanche.

In the first quarter of 2023, the team will conduct an incentive test to begin public testing and reward testnet validators with a potential seed of native tokens.

Celestia Testnet Incentive Announcement. Source: Celestia’s Discord

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Fuel Labs, the development team behind the Fuel Network, has also developed the Fuel Virtual Machine (FuelVM) and the Sway programming language, which increase the speed of transactions. Team launched its second beta testnet in November 2022, while the public testnet is expected to go live sometime in 2023.

While the interoperable space remains underdeveloped and subject to the risks of centralization, various teams are working on decentralized solutions to be launched in 2023. These protocols will securely bridge liquidity between DeFi protocols and other layer 1 blockchains. On top of that, they will also help build a multi-chain future where the user experience is blockchain independent and interoperates seamlessly with each other.

The views, thoughts and opinions expressed here are those of the authors only and do not necessarily reflect or represent the views and opinions of Cryptooshala.

This article does not contain investment advice or recommendations. Every investment and trading step involves risk, and readers should do their own research when making a decision.

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