Scaling and interoperability solutions are the core plumbing of the crypto industry. Today, there are over 100 active public blockchains. Bridges are essential to enable the transfer of assets and information between one chain and another. But before diving into blockchain bridges, why should blockchains be interoperable in the first place? Reviewing some Economics 101 may help clarify.
Consider a simple world of two economies, Belgium and France, that only produce beer and wine, respectively. It is common knowledge that France is better at producing wine than Belgium. The country has the production facilities, labor, expertise, and climate – though the latter might change with global warming. Relative to beer country Belgium, it is not hard to imagine it costs France more to produce beer. In this simple model, both countries specialize in producing one good.
In reality, the French (usually) don’t only want to drink wine. In the absence of trade, they are happy to give up some production of wine to produce beer. The problem is that it would be much more efficient if France could export its excess wine and import beer from Belgium. The same reasoning holds for Belgium as a specialized producer of beer. The optimum is evident: both economies can enjoy more goods for the same amount of resources by engaging in trade.
Trade theory shows us that every economy benefits from trade one way or the other. The same train of thought can be applied to blockchain ecosystems. Blockchains also specialize in unique use cases, target audiences, and geographies. The most critical differences follow from the scalability trilemma coined by Vitalik Buterin. All networks have to make a trade-off between being fully decentralized, secure, or scalable. For example, Ethereum prioritizes decentralization and security over scalability. Solana, on the other hand, optimizes performance at the cost of decentralization. In this example, trade theory shows us we should run compute-intensive applications such as derivatives on Solana and process critical transactions on Ethereum. That is if these blockchains can “trade” information with each other.
The scalability trilemma is exactly why alternative smart contract platforms gained so much traction in 2021. Instead of maximizing Ethereum, users jumped over to different networks for different applications. Over the last year, total value locked (TVL) increased from $18 billion to just shy of $250 billion across Layer-1s and scaling solutions. As the market continues to grow, Ethereum’s dominance may slowly deteriorate over time. Today, Ethereum controls roughly 60% of total assets locked in smart contract platforms. That’s a 30% decline from August 2020 – a clear signal that crypto is moving towards a multi-chain world.
All of these new blockchains need to talk with each other instead of competing in silos, and effective cross-chain connectors are necessary to induce communication across chains. The need for cross-chain communication is where bridges enter the scene. They open up a whole new playing field: they enable users to access new platforms with their assets, protocols to interoperate with each other, and developers to build out new features and products. There is an incredible opportunity in bridging infrastructure, and Allbridge is laying the foundation.
Allbridge
Launched in July 2021, Allbridge is a Proof-of-Stake blockchain bridge with on-chain consensus. The platform provides a simple and reliable way to transfer tokens between various networks. Allbridge is backed by APYSwap Foundation and initially focused on bridging Solana with other chains. It was therefore originally called Solbridge. Realizing it could use its expertise to bridge any network, the project rebranded to Allbridge. The team now aspires to create a decentralized multi-chain hub for bridging assets. To fund these ambitions, Allbridge launched its token ABR on the Boca Chica and Smartpad launchpads in September 2021. The project also recently underwent a rebranding to improve user experience and cater to a broader audience.
Source: Allbridge App
Allbridge bridges tokens across Ethereum Virtual Machine (EVM), Layer-2, and non-EVM compatible blockchains and plans to support NFTs in the future. The protocol uses a modular architecture to integrate additional chains more efficiently. The result: the bridge was able to support 47 assets across Ethereum, BSC, Solana, Polygon, Avalanche, and six other networks in seven months. Aurora and Harmony are the latest blockchains to be supported on the platform.
A total of $5 billion has been bridged on the platform to date – a 117% increase from the $2.3 billion bridged in October. In December, $231,000 in fees were collected on the platform, and on average, 2,900 transfers were made on Allbridge every day. Solana is the most active network with a 44% share in fees collected. At the time of writing, close to $380 million in assets are locked in its liquidity pools. Those are healthy numbers for any seven-month-old protocol, and clearly, there’s a significant opportunity left as Allbridge continues to integrate new blockchains and tokens.
How Is Allbridge Built?
Allbridge has a very intuitive platform for users. Users connect their wallets and execute a send transaction on source blockchain A and a receive transaction on destination blockchain B. The transfer only takes as long as it takes to transact on the two blockchains. This means that the transfer can be completed almost instantly if the confirmation speed is fast enough.
Source: Documentation
Behind this simple user experience lies an innovative protocol design. Users can make four different transfers on Allbridge:
Send native tokens and receive native tokens: Native tokens are locked on blockchain A and unlocked on blockchain B. This works similar to a DEX with two liquidity pools facilitating a swap.
Send native tokens and receive wrapped tokens: Native tokens are locked in the liquidity pool on blockchain A, and wrapped tokens are minted on blockchain B.
Send wrapped tokens and receive native tokens: Wrapped tokens are burned on blockchain A, and native tokens are unlocked from the liquidity pool on blockchain B.
Send wrapped tokens and receive wrapped tokens: Wrapped tokens are burned on blockchain A, and minted on blockchain B.
Transfers are completed by a series of requests between the user, the smart contracts on both blockchains, and the validators. A detailed walkthrough of all transfers can be found in the documentation.
As an example, transferring native tokens for wrapped tokens, the user sends native tokens to the smart contract on blockchain A. The smart contract locks the tokens and creates a request log when the transaction is completed. Before the user can send the receive transaction to blockchain B, the validators must first check the request log. If the validators conclude the funds are correctly locked on blockchain A, they send a signature to the user, who sends the signature to the smart contract on blockchain B. The smart contract then mints the appropriate amount of wrapped tokens and sends them to the user. The wrapped token tracks the price of the original asset using oracles but is compatible with the other blockchain. This lock-and-mint process ensures a 1:1 relation between the locked and minted tokens across the two chains.
Source: Documentation
Validators play a defining role in Allbridge. Every bridging transaction has to be confirmed by a two-thirds majority of validators. In return, they receive their fair share of the fees when a transaction is signed successfully. To become a validator, one must meet specific technical requirements. These requirements are primarily related to the ability to set up servers and nodes. In addition, validators must stake ABR tokens. These staked funds are slashed in case a validator behaves maliciously. Slashing incentivizes validators to act in the best interest of the protocol.
Unlike most bridging solutions, Allbridge uses an on-chain validator consensus. This means that every validator transaction can be tracked and verified on-chain, which improves transparency for the protocol. A dedicated block explorer will be developed to monitor transfers.
Security
According to PeckShield, bridges were hacked for a record high of $644 million in Q3 2021. This includes the $611 million stolen from Poly Network in what is likely the most significant theft in DeFi history – even though the funds were returned a few weeks later. In addition, the study found that $147 million, or 55% of illicit assets, were cashed out through cross-chain bridges in the first six months of 2021. Clearly, there is a lot of criminal activity in the bridge space. Therefore, the ideal blockchain bridge should not only be interconnected, high-throughput, cost-effective, and trustless but must also be very secure.
The team has expressed several measures to upgrade security, such as ordering additional security audits, implementing a kill switch, and limiting the outbound transactions. In October 2021, the audit performed by blockchain security consultant Hacken found Allbridge’s code to be well-secured.
Tokeneconomics
The Allbridge ecosystem is powered by the ABR and xABR tokens. The tokens are used to pay for fees and staking as follows:
Users are charged a fixed bridge fee of 0.3% for every transfer. These fees are paid in the token that is transferred. Projects must pay a monthly subscription to use the bridge. The subscription fee is paid in ABR. Of all the fees generated on the platform, 80% is swapped to ABR and distributed to stakers. The remainder is distributed to the team.
Stakers can lock ABR on all integrated blockchains. In return, they receive xABR tokens one-for-one, which represent their share in the blockchain staking pool. Stakers earn rewards from fees and incentivization programs. When rewards are added to the staking pool, the number of ABR in the pool increases, and xABR becomes worth more than ABR. The xABR tokens are burned in exchange for ABR when users unstake and thus receive more ABR than they initially locked. This is how stakers can generate yield on Allbridge.
Source: Documentation
In addition to attractive yields, stakers also benefit from dynamic percentage fees. Users that hold xABR on a particular blockchain are charged less for transactions sent from that network. The bridge fees are reduced exponentially. This means that users can enjoy a large reduction in fees by staking only a small amount. At present, as little as 10 xABR reduces the fee from the fixed rate of 0.3% to 0.2%. The bridge fee depends on the user’s pool share and therefore changes dynamically with TVL. The minimum fee is currently set at $0.50. The fee model is designed to incentivize staking and is an important value proposition to users.
A total of 100,000,000 ABR tokens were distributed to the community, APYSwap, team, staking and liquidity pools, incentive programs, and ecosystem DAO. The public sale was held on launchpads Boca Chica and Smartpad in September 2021. There are several categories of recipients for which tokens will be unlocked linearly over a multi-year period and subject to semi-annual or annual cliffs. The initial distribution and unlock schedules were as follows:
Source: Documentation
Are All Bridges Created Equal?
Many developers have realized the opportunity for connectors in the multi-chain world. At the time of writing, there are more than 40 different bridge projects. While they all seek to make the crypto space more interoperable, they are not all created equal. Dmitriy Berenzon best categorized four types of bridges:
Asset-specific: Bridges that provide access to a specific asset from a foreign chain. BTC is the most common asset to be bridged, and BitGo’s Wrapped BTC is the largest bridge of BTC to Ethereum.
Chain-specific: Bridges that connect two different networks. The most popular ones are Layer-2 bridges. For example, Avalanche Bridge allows users to transfer assets from Ethereum to Avalanche and vice versa.
Application-specific: Applications that provide access to two or more blockchains, but only for use within those applications. Examples include Compound Gateway and Thorchain, building separate blockchains for cross-chain lending and exchange.
Generalized: Protocols that are designed to transfer information across multiple blockchains. Allbridge is a generalized bridge for asset transfers. Another example is Chainlink, which bridges off-chain information across multiple networks.
Throw together 100+ networks and 40+ projects across four categories, and you end up with a market that is inherently fragmented. In essence, Allbridge competes with any project that facilitates asset transfers across networks. Projects like Compound Gateway and Chainlink are therefore not considered as competitors. Note that the competitive landscape illustrated below is not fully comprehensive for the sake of simplicity.
With the rise of alternative smart contract platforms, bridges to Ethereum are imperative to increase adoption. Ethereum bridges have therefore completely exploded this year. With barely $0.7 billion TVL in April, more than $22 billion worth of assets) are now locked in the market. That’s roughly 9% of TVL in smart contract platforms. At the time of writing, there have been 83,000 unique depositors over the past 30 days, and Polygon bridges hold the largest TVL at $6.0 billion. Avalanche bridges and Axie Infinity’s Ronin Bridge come in second and third at $5.4 and $4.8 billion, respectively. As alternative blockchains become more and more popular, these numbers will only multiply in the future.
Closing Summary
By now, it is clear that we are moving towards a multi-chain world. So instead of burning bridges, there is a growing need for cross-chain connectors. These bridge projects must support as many assets and networks as possible at the fastest speed and lowest cost possible. And while there is fierce competition in the market, builders must remain disciplined and implement the highest security standards to prevent malicious activity.
Allbridge is working towards a single-window system. It wants to offer a universal bridge where all assets can be accessed regardless of the blockchain. This is reflected in its roadmap. Broadly, the team is focusing on four main topics:
Blockchains: New networks are continuously integrated to strengthen its position as a generalized bridge. With 12 of the largest networks already supported on the platform, Allbridge aims to integrate Tezos, NEAR, Arbitrum, Optimism, and other networks next.
Decentralization: More validators will be added at the beginning of 2022, and a DAO interface will be launched to become a truly decentralized bridge. There is no planned date for the interface yet.
Marketing: Following its recent rebranding and UX improvements, Allbridge will launch a series of marketing campaigns and incentivization programs to attract users. The team will also establish DEX partnerships to build out its ecosystem.
B2B products: As the user-facing bridge becomes more established, Allbridge also wants to build its B2B offering. The team plans to launch an open API in Q1 2022 and implement an interface for project subscriptions. In the future, Allbridge seeks to offer a bridge-as-a-service API solution to AMMs and other projects.
Thus far, Allbridge has been able to deliver on its promises. Its modular architecture has proven itself an effective way to bridge new networks. Over the last several months, the platform has offered over 132 bridge directions across 12 networks. The project is also gaining traction, with over $5 billion bridged in total. It remains to be seen whether the team can guarantee security for the protocol and head up against more established players like Multichain. If Allbridge can continue this trajectory, there appears to be an exciting road ahead for the project.
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