Decentralized Finance apps have swept the bitcoin world in the last year and a half. Hundreds, if not thousands, of protocols, have been created, garnering millions of users and billions of dollars in funding. However, the large inflow of users caused an unsustainable network demand for the Ethereum ecosystem, resulting in exorbitantly expensive fees for miners to include transactions on the blockchain. DeFi applications become almost useless for the ordinary user as a result of these costs.
DeFi protocols began adding support for other blockchains that were (in principle) more scalable than the Ethereum base layer as a solution. Layer 2 blockchains that interact with Ethereum, such as Polygon, and alternatives like Binance Smart Chain, have emerged as options. While these options provide a possible answer to the fee problem, they also introduce a new issue: Liquidity fragmentation.
Moving money between chains is complex and expensive for experienced DeFi users. It’s nearly complicated for newbies to do so, much alone comprehend the issues in the first place. While the fee issue has been resolved, these distinct solutions have effectively divided liquidity into different markets separated from one another. On Polygon, a trading pair may have liquidity, but not on ETH or BSC, for example. This presents the industry with a substantial new problem.
Cross-chain bridges to the rescue
A cross-chain bridge is a self-evident and nearly natural solution to the problem of liquidity fragmentation. It allows liquidity to move quickly across blockchains, improving the system’s capital efficiency. Bridges of this type can connect two blockchains, a blockchain, a side chain, or even two side chains. This interoperability allows tokens, data, and even smart-contract instructions to be transferred between different platforms. Projects can also transfer assets published on one network to dapps on other networks via cross-chain bridges.
These bridges and their applications might go beyond merely asset transfers since they open up a whole new universe of possibilities, such as establishing a secure decentralized communication network that can convey signals from one blockchain to the next. Consider them inter-blockchain communication network building blocks.
A bridge infrastructure based on the Router Protocol
This function is supported by the Router Protocol, a cross-chain bridge. ParaRouter contracts will be placed on multiple blockchains, and they will interact with one another via a central router. All money moving via the protocol is first converted to stablecoins on the source chain, then exchanged for the user’s preferred asset on the target chain.
The protocol must be plugged into an AMM for cross-chain swaps, which is where Dfyn comes in. The Dfyn DEX serves as the liquidity reserve for the Router Protocol, facilitating cross-chain trades and exchanges.
All transactions on a blockchain-based DEX are recorded on-chain, giving users complete and absolute visibility into what’s happening behind the scenes.
Router Protocol will favor Dfyn integration on chains having Dfyn nodes. It will not, however, be the only AMM that Router Protocol will use. In the spirit of decentralization, Router Protocol will integrate as many AMMs as possible to efficiently give the cheapest rates to consumers. Router Protocol will also keep its single asset reserves for stablecoins and popular assets like ETH and MATIC to allow inexpensive, ultra-fast cross-chain transfers.
What sets Router unique is its ability to act as a liquidity aggregator, which means it can tap into pre-existing liquidity on any target chain. Dfyn will be utilized as Router’s emergency liquidity reservoir if there is little to no liquidity of stablecoin assets on a destination chain for whatever reason.
Comparing and Contrasting
The table above clearly speaks for itself. Other than Thorchain, no other project, in terms of different characteristics, really tackles the whole potential area in as thorough a manner as Router.
The essential purpose of a cross-chain bridge and DEX is access to viable liquidity. Trades become costly, and traders experience a lot of slippages if there isn’t enough liquidity. By aggregating liquidity from pre-existing AMMs, Router Protocol gets the best of both worlds, regardless of where the liquidity comes from. It can offer the most acceptable market prices in a way that its competitors are unable to.
It’s not enough to have sufficient cash; it also has to be maintained. Because they need regular rebalancing to sustain adequate liquidity on all sides of the bridge, most current cross-chain protocols are not sustainable or scalable in their current form. Despite its uniqueness, Thorchain needs all liquidity to pass via RUNE tokens. The Router Protocol depends on arbitrageurs to maintain appropriate liquidity levels while utilizing stablecoins as the medium of exchange, guaranteeing that the money involved is protected and that no value is lost due to volatility-driven slippage.
About Router Protocol
Router Protocol is developing a set of cross-chain liquidity infrastructure primitives to provide seamless connectivity between existing and upcoming Layer 1 and Layer 2 blockchain solutions.