Thanks to the cross-chain deposits, we can enhance the following:

• liquidity;

• asset utilization;

• cross-chain collaborations.

One of the manifestations of cross-chain deposits is seen in the creation of cross-chain bridges, which have significantly grown in lock-up value from $25 billion to over $200 billion within a year, indicating utilization of cross-chain interoperability solutions​​.

Cross-chain bridges not only cater to asset deposits but also extend to payments, as shown by a proof-of-concept cross-chain payments application integrated with Shopify during the 2022 EthSF hackathon​​.

Moreover, developers can orchestrate flows enabling users to transfer assets like USDC across chains and subsequently deposit the newly minted USDC into a DeFi lending pool. In turn, this illustrates a practical utilization of cross-chain deposits in fostering capital efficiency and yield generation in the DeFi landscape​​. 

The whole process can be designed to provide a seamless user experience. Users should feel like they are performing a singular transaction despite the underlying cross-chain interactions.

This article aims to address the technical details of cross-chain deposits, exploring the protocols, technologies, and mechanisms utilized in Swing that enable such cross-network asset transfers. 

By examining real-world use cases, technical frameworks, and existing challenges, we want you to understand the technological landscape governing cross-chain deposits. Hopefully, this would contribute to the broader discourse on blockchain interoperability and cross-chain innovations.

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Table of Contents:

• Cross-Chain Deposit Mechanism

• Cross-Chain Deposit Protocols and Standards

• Technical Challenges in Cross-Chain Deposits

• Technical Implementation of Cross-Chain Deposits

• Use Cases of Cross-Chain Deposits

• Emerging Technical Trends

• Conclusion

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🔀Cross-Chain Deposit Mechanism

This section aims to provide a detailed understanding of cross-chain deposit mechanics. 

👉 Cross-chain Transaction Certificate

In some cross-chain processes, a cross-chain deposit certificate is generated at the end of a cross-chain transaction, indicating that the transaction has been completed.

👉 Cross-chain Bridges

Cross-chain bridges operate by "wrapping" tokens in a smart contract on the source blockchain and issuing equivalent assets on the destination blockchain. For example, Bitcoin (BTC) can be deposited on the Bitcoin blockchain to receive wrapped BTC (wBTC) on the Ethereum blockchain.

👉 Cross-Chain Transfer Protocol (CCTP)

A user can initiate a transfer of assets like USDC from one blockchain to another using the app. The app helps in burning the specified amount of USDC on the source chain, marking the start of the transfer process.

👉 On-chain Atomic Swaps

These are special types of cross-chain swaps where the swap happens directly on both blockchains involved. For instance, swaps between Decred (DCR) and Litecoin (LTC), or LTC and BTC, are examples of on-chain atomic swaps.

👉 Cross-chain Interoperability

Cross-chain interoperability is achieved by setting up data association and interaction between chains while maintaining resource isolation to a great extent, thereby enabling cross-chain deposits and other cross-chain interactions.

⚙️ Cross-Chain Deposit Protocols and Standards

Various protocols and standards have been developed to enable the above-described cross-chain deposit mechanisms. Let’s now delve into some notable protocols and standards.

👉 Cross-Chain Interoperability Protocol (CCIP)

The Cross-Chain Interoperability Protocol (CCIP) is one of the notable standards aiming to foster a universal connection among numerous blockchain networks, both public and private. 

CCIP facilitates the transfer of data and smart contract commands across different blockchain networks, unlocking isolated tokens and aiding in the development of cross-chain applications. 

The protocol serves as a foundation for services like Chainlink’s Programmable Token Bridge, which stimulates users to transfer tokens across any blockchain network securely and efficiently​​.

👉 Three-Stage Cross-Chain Protocol

In response to the challenges of prolonged transaction time, high transaction costs, and a significant degree of centralization in most cross-chain protocols, a Three-Stage Cross-Chain Protocol has been proposed. 

👉 IEEE Standards

IEEE has developed standards for blockchain interoperability that describe technical architectures of three cross-chain approaches, including:

• Centralized/Multi-signature Notary-based cross-chain technology;

• HTLC-based cross-chain technology;

• Relay Chain-based cross-chain technology​​.

👉 Swing’s Cross-Chain Deposit Mechanism

Swing facilitates cross-chain deposits by passing tokens and contract-call data through a bridge to bridge assets and execute contract calls on the destination blockchain. 

This mechanism allows developers to perform cross-chain transactions in a single transaction on the source blockchain, eliminating the need to switch RPC or sign another transaction on the destination blockchain. 

Swing's cross-chain deposit functionality is supported on various chains, including Ethereum, BSC, Avalanche, Polygon, Arbitrum, Optimism, and Fantom​​.

🛑 Technical Challenges in Cross-Chain Deposits

The technical hurdles in cross-chain deposits are rooted in the fundamental differences in the architecture, consensus mechanisms, and smart contract capabilities among various blockchains. 

We explain the primary technical challenges:

• Atomicity: Ensuring that a cross-chain transaction either fully succeeds or fails is a significant challenge. Cross-chain transactions usually comprise multiple sub-transactions on different blockchains, which must be coordinated effectively to achieve atomicity​​.

• Security Requirements: Different security measures and consensus mechanisms across blockchains pose a challenge to creating a secure cross-chain deposit framework. This extends to the security requirements surrounding hash-locking, notary schemes, and distributed private key control​​.

• Technical Limitations: The technical limitations in existing cross-chain methods, like sidechains/relays and tight coupling, need addressing to enhance the efficacy of cross-chain deposits​​.

• Interconnected Blockchain Ecosystem: Achieving a unified, interconnected blockchain ecosystem to facilitate cross-chain deposits involves overcoming challenges in creating groundbreaking cross-chain solutions like atomic swaps, Polkadot, and Cosmos​​.

Swing has been at the forefront of addressing the technical challenges associated with cross-chain deposits. Below are some of the initiatives and developments by Swing:

• Swing Widget — a notable breakthrough in cross-chain liquidity. This product facilitates easy integration into any Decentralized Exchange (DEX), wallet, or DeFi platform, offering instant access to cross-chain liquidity​​.

• Swing expanded its cross-chain liquidity and bridge aggregation to MultiversX. In this way, we aim to roll out the protocol across various blockchain ecosystems​​.

• The launch of our Web3 Developer Tools aims to accelerate crypto adoption by providing a decentralized cross-chain protocol. This protocol connects dApp developers to blockchains, ecosystems, and decentralized liquidity, serving as a unified liquidity integration platform. With our comprehensive API, SDK, and widgets, developers are equipped with robust tools to build and optimize their decentralized applications. Furthermore, the Swing Platform greatly simplifies the pain of accessing and managing cross-chain liquidity, making the development process easier.

• We launched a Software Development Kit (SDK) that supports 25 non-EVM and EVM-compatible chains. This development is part of Swing's plan to expand and cover non-EVM networks like Solana and Cosmos. It makes the transfer of crypto assets across different networks possible and simplifies the deployment of cross-chain solutions​​.

• Swing's API and SDK offer a cross-chain contract feature allowing developers to execute contract calls on different blockchains. This feature enables interoperability between blockchain ecosystems, a core aspect in addressing the technical challenges of cross-chain deposits​​.

  ---

🛠 Technical Implementation of Cross-Chain Deposits

Here is a step-by-step guide to setting up and executing cross-chain deposits, particularly leveraging Swing's SDK. 

We'll delve into a simple four-step process to get started with Swing:

Step 1: Get Available Deposit Contracts

The first step toward executing cross-chain deposits is to confirm the available deposit contracts. This can be achieved by querying the Swing API to retrieve a list of supported deposit contracts.

curl https://api.swing.xyz/v1/deposit_contracts

Step 2: List Available Routes

Once the deposit contracts are retrieved, the next step is to list the available routes for the cross-chain deposit. We have to identify the source and destination blockchains, along with the tokens to be transferred.

curl https://api.swing.xyz/v1/routes?source_chain=ethereum&destination_chain=bsc

Step 3: Execute a Deposit

Executing a deposit involves invoking the deposit function from the Swing SDK. This step triggers the transfer of assets from the source blockchain to the destination blockchain.

const swing = require('swing-sdk');

// Initialize Swing SDK

const swingSDK = new swing.SDK({ apiKey: 'your-API-key' });

// Execute deposit

swingSDK.deposit({

  sourceChain: 'ethereum',

  destinationChain: 'bsc',

  amount: 100,

  token: 'USDC',

  receiver: 'receiver-address'

});

Step 4: Withdraw Funds

The final step is to withdraw the funds from the destination blockchain. This is done by calling the withdraw function from the Swing SDK.

// Withdraw funds

swingSDK.withdraw({

  destinationChain: 'bsc',

  receiver: 'receiver-address'

});

Security Measures

Following the guide from above, don’t neglect the basic rules:

• API Security: Keep your project IDs securely stored and never exposed to unauthorized entities.

• Smart Contract Auditing: Before engaging in cross-chain deposits, have the smart contracts involved thoroughly audited to prevent potential security breaches.

• Error Handling: Implement robust error handling to manage potential issues that may arise during the deposit or withdrawal process.

• Monitoring: Continuously monitor the cross-chain deposit transactions to confirm they are processed as expected.

  ---

💡 Use Cases of Cross-Chain Deposits

Through cross-chain deposits, industries can unlock new levels of interoperability, liquidity, and functionality, which are crucial for the maturation of the blockchain ecosystem.

Let’s take a look at some of the most common technical use cases of cross-chain deposits:

👉 Staking Protocol Deposits

Cross-chain deposits enable a streamlined process for staking assets in different blockchain protocols. 

For instance, converting MATIC on Polygon to ETH on Ethereum and staking into Lido staking protocol usually entails numerous steps. 

However, with Swing, developers can execute all steps in a single transaction on Polygon, thus simplifying the process significantly.

👉 Lending Protocol Deposits

Similarly, cross-chain deposits facilitate seamless lending protocol deposits across multiple blockchain networks. 

This functionality is crucial for users who want to lend and borrow assets across different blockchain networks, thus enhancing the liquidity and functionality of lending protocols.

👉 Decentralized Applications And Decentralized Finance

Cross-chain deposits enable the transfer of assets across different blockchain networks, which is crucial for many DeFi applications:

• DEXs;

• lending/borrowing protocols;

• liquidity staking;

• derivatives/perpetual DEXs;

• yield aggregators;

• launchpads;

• NFT protocols. 

By adding liquidity through cross-chain deposits, these platforms can significantly increase their TVL, which, in turn, augments their utility and attractiveness to users.

👉 Cross-Chain Token Swaps

With cross-chain token swaps, users can swap tokens across different blockchain networks effortlessly. 

For instance, a user could swap ETH on Ethereum for MATIC on Polygon, where Swing handles the exchange from ETH to MATIC, allowing the user to interact with the Polygon network in a single transaction. With that, Swing uses tokens from the source chain to pay gas on the destination chain, so the user doesn’t need to have native tokens of the destination chain.

📈 Emerging Technical Trends

The technology of cross-chain deposits will further enhance the interoperability, security, and ease of deployment across multiple blockchains. And Swing is going to be at the forefront of these advancements.

We also plan to deliver cross-chain liquidity from 24+ chains on the Sei Network, thereby enabling Sei builders to tap into liquidity from dozens of decentralized exchanges (DEXs), bridges, and chains​​. 

The future of cross-chain deposits is envisioned to be highly intertwined with the development of DeFi and cross-chain dApps, with an emphasis on creating more secure and efficient bridges for asset transfers. 

The advancement in protocols and standards, alongside robust security measures, will likely drive the widespread adoption of cross-chain deposits, thereby contributing to a more interconnected and functional blockchain ecosystem.

✍️ Conclusion

The technical applications of cross-chain deposits, ranging from staking and lending protocol deposits to DeFi and cross-chain token swaps, showcase the extensive potential and diverse advantages this technology introduces to the blockchain industry.

We invite developers to dive further into the technical dimensions of cross-chain deposits and try out the documented examples.

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Introduction

Cryptocurrencies have gained popularity over the years, attracting a large number of traders and investors. One of the challenges that traders face in the cryptocurrency market is liquidity fragmentation. Liquidity fragmentation occurs when liquidity is divided across different blockchain networks, resulting in a lack of liquidity within each network. For example, if a user wants to trade a particular token on a specific blockchain network, they may not be able to find a buyer or seller, resulting in a lack of liquidity. This limits the growth and adoption of DeFi services and results in a suboptimal user experience leading to high volatility, increased transaction costs, and reduced trading opportunities.

In this article, we will explore liquidity fragmentation in the cryptocurrency market, its causes, and its effects. We will also discuss how one can mitigate the risks associated with liquidity fragmentation.

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Historical Data

The issue of liquidity fragmentation is not new in the crypto market. In 2017, the price of Bitcoin on the South Korean exchange, Bithumb, reached almost $20,000, which was significantly higher than the price of Bitcoin on other exchanges. This price discrepancy was due to the limited liquidity on the Bithumb exchange.

Another example of liquidity fragmentation occurred in March 2020, when the price of Bitcoin on BitMEX, a popular cryptocurrency derivatives exchange, crashed to almost $3,600. This price discrepancy was due to a large sell-off on the BitMEX exchange, which caused the price of Bitcoin to plummet on that exchange compared to other exchanges.

The need for cross-chain liquidity has become increasingly apparent over the years. In 2017, there was a significant increase in the number of blockchain networks and tokens, resulting in liquidity fragmentation. As a result, users were unable to trade tokens across different blockchain networks, limiting the growth and adoption of DeFi services.

The introduction of cross-chain solutions, such as atomic swaps, enabled users to transfer assets between different blockchain networks. However, atomic swaps have limitations, including low liquidity, limited token support, and high fees.

In recent years, cross-chain bridge aggregators have emerged, addressing the limitations of atomic swaps and enabling users to access liquidity across different blockchain networks. This has resulted in significant growth in the DeFi space, with the total value locked (TVL) in DeFi protocols increasing from less than $1 billion in early 2020 to over $200 billion in early 2022.

Why Does Liquidity Fragmentation Occur?

There are several reasons why liquidity fragmentation occurs in the cryptocurrency market. These include:

• Lack of Standardization: The cryptocurrency market lacks standardization in terms of trading pairs, order types, and trading fees. This makes it difficult for traders to compare prices across different exchanges, resulting in trading volumes being spread across multiple exchanges.

• Regulatory Differences: Cryptocurrency regulations vary significantly across different countries and jurisdictions. This has led to some exchanges being unable to operate in certain regions, reducing liquidity levels.

• Market Volatility: Cryptocurrency markets are highly volatile, and this can lead to sudden shifts in trading volumes. When traders move their funds from one exchange to another, liquidity levels can drop significantly on the exchange they are leaving.

• Network Congestion: Cryptocurrencies such as Bitcoin have limited transaction processing capabilities. During times of high demand, network congestion can result in slow transaction times and high transaction fees. This can discourage traders from using a particular exchange, resulting in liquidity fragmentation.

Spread across more than 30+ categories and 2000+ protocols you can see below how fragmented the current state of liquidity is concerning the total value locked in the respective ecosystems.

Effects of Liquidity Fragmentation

Liquidity fragmentation can have several negative effects on the cryptocurrency market. These include:

• Increased Volatility: Low liquidity levels can result in sudden price fluctuations, making it difficult for traders to execute their trading strategies.

• Reduced Trading Opportunities: Low liquidity levels can lead to reduced trading opportunities, as there may not be enough buyers or sellers on a particular exchange.

• Higher Transaction Costs: When liquidity is fragmented across multiple exchanges, traders may need to pay higher transaction fees to move funds between exchanges.

• Inefficient Price Discovery: Liquidity fragmentation can result in inefficient price discovery, as prices may vary significantly across different exchanges.

How Can Traders Mitigate the Risks of Liquidity Fragmentation?

Traders can take several steps to mitigate the risks associated with liquidity fragmentation. These include:

• Using Multiple Exchanges: Traders can use multiple exchanges to spread their trading volumes and reduce the impact of liquidity fragmentation. By using exchanges with high liquidity levels, traders can improve their chances of executing trades at favorable prices.

• Using Trading Bots: Trading bots can help traders execute trades automatically based on predefined criteria. This can help traders take advantage of trading opportunities across multiple exchanges, even when they are not actively monitoring the market.

• Monitoring Market Depth: Traders should monitor market depth across multiple exchanges to identify where liquidity is concentrated. This can help them make informed decisions on which exchanges to use for specific trades.

• Diversifying Trading Strategies: Traders should diversify their trading strategies to reduce their reliance on any one particular exchange. By using a variety of trading strategies, traders can take advantage of trading opportunities across multiple exchanges.

The effects of liquidity fragmentation can be significant. For traders, it means that they may not be able to find counterparties for their orders, leading to higher transaction costs and increased risk. For markets, it can lead to reduced price discovery and increased volatility, as orders are executed at different prices across different platforms.

Exchanges (DEX) Based Liquidity Fragmentation

How Can Developers Help Reduce Liquidity Fragmentation?

Developers can play a crucial role in reducing liquidity fragmentation in the crypto market by creating innovative solutions that improve market efficiency and enhance price discovery. Here are some of how they can contribute:

• Standardization: Developers can work on creating industry standards for trading protocols and order books, which would make it easier for different platforms to interoperate with each other.

• Interoperability: Developers can create solutions that allow different platforms to communicate with each other, enabling traders to access liquidity across multiple venues.

• Aggregation: Developers can create tools that aggregate liquidity from multiple platforms, providing traders with a single point of access to multiple markets.

• Market Making: Developers can create market-making tools that provide liquidity to the market, helping to reduce spreads and improve price discovery.

As the cryptocurrency market continues to grow, new projects are emerging to address the challenge of liquidity fragmentation. One such project is Polkadot, a multi-chain network that enables communication between different blockchain networks. Polkadot aims to address the limitations of current blockchain networks and enable cross-chain communication, enabling developers to create new DeFi solutions that can be used across different blockchain networks.

Another project is the Cosmos Inter-Blockchain Communication (IBC) Protocol. The Cosmos IBC protocol enables the communication between different blockchain networks and enables users to transfer assets seamlessly between them. This will enable developers to create new DeFi solutions that can be used across multiple blockchain networks, reducing liquidity fragmentation.

Conclusion

Liquidity fragmentation is a significant challenge facing the crypto market. It leads to limited liquidity, price discrepancies, and suboptimal pricing for traders. However, it also presents opportunities for increased trading volume and new market niches. The development of cross-chain solutions, DEXs, and liquidity aggregators can address the challenge of liquidity fragmentation, enabling users to access a larger pool of liquidity and reducing trading fees. As the cryptocurrency market continues to grow, new projects such as Polkadot and the Cosmos IBC Protocol are emerging to address the challenge of liquidity fragmentation, enabling developers to create new DeFi solutions that can be used across multiple blockchain networks.

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The emergence of a multi-chain world has brought great benefits to DeFi users, who are no longer at the mercy of Ethereum’s erratic network fees and bottlenecks. Now, assets can be swapped quickly and at a low cost across any AMM and network of your choosing. Furthermore, the proliferation of cross-chain bridges has made it easy to migrate assets to different ecosystems, which can be connected to them, from a single web wallet.

We are living through the multi-chain future we all dreamed of. But now we are here, it is clear that this promised land isn’t quite as great as we hoped it would be. Yes, the interface design is light years ahead of what we were lumped with in DeFi’s early days and we are blessed with a cornucopia of financial products that can be traded on-chain. Options; perpetual swaps; NFTs; indexes; you name it, it is all here. There is just one thing that’s missing: liquidity.

The Balkanization of DeFi

In the race to recreate Ethereum, minus the bad bits, on multiple networks, something has gotten lost along the way. The balkanization of DeFi has resulted in greater choice but less liquidity with which to make that choice.

To ameliorate this problem, aggregators have sprung up that can fill orders from multiple AMMs on one chain. 1inch, for example, can execute swaps on Ethereum DEXs such as Uniswap and SushiSwap. While such solutions can deliver better pricing and reduce slippage for DeFi traders, they are hampered by intra-chain constraints. The liquidity that resides on other networks remains inaccessible, curtailing the efficacy of aggregators.

The solution sounds simple: develop a cross-chain liquidity aggregator. The implementation, needless to say, is anything but. There are many challenges to solve when going cross-chain, ranging from security to routing assets to their intended destination.

How do you get tokens that exist on networks A, B, and C into the wallet of a user on network D? From a theoretical perspective, it can be done. From a practical perspective, it is a complex undertaking. But the rewards for doing so are huge. Aggregating all liquidity into one place is the holy grail of DeFi. For only then can the industry’s potential to support trades of all sizes and types in a frictionless and price-efficient manner be realized.

Cross-Chain Swaps in Action

Following months of extensive development, refinement, testing, and auditing, Swing’s cross-chain liquidity solution is ready for deployment. It will support swaps across not only EVM chains but also non-EVM networks such as Solana, Elrond, and Cosmos. And it is all implemented from a single interface that provides a seamless user experience. Here is how it works.

Suppose a user wishes to swap 0.5 WBTC on Polygon for ETH on Ethereum. To minimize the cross-chain AMM slippage, Swing will first swap WBTC to stable tokens (USDC/USDT/DAI/BUSD/FRAX and etc) which is what we called the bridge token. The choice of the bridge token depends on the depth of the liquidity pools across all bridges and Swing will simulate the cross-chain swap aiming to find the best price. In this example, let us assume the bridge token is USDC. Swing will then check the liquidity pools of DEXes on both the source chain and destination chain to get the best price for swapping WBTC to USDC (on polygon) and USDC to ETH (on Ethereum).

With all the information above, Swing’s algorithm will calculate and return the most efficient path for the trade. Different bridges might charge differently; in this case, Swing stands firmly on the customer’s side, finding the best, most efficient path with higher return and lower cost.

There are numerous “hops” or steps to this process, including finding the best dexes to do the token swapping on both source and destination chains, finding the bridge with the best pricing, and locking and unlocking tokens using bridge smart contracts on multiple networks. But from the user’s perspective, all of this is abstracted away. All they see is the WBTC leaving their wallet on Polygon and the ETH appears on Ethereum, obtained at the best price available. Users can also monitor the token swap progress with full transparency including where the funds are sent to and when the funds arrive in the wallet on the destination chain. Swing also offers history checks for users with auditing requests.

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