What Is Cross-Chain DeFi?

Cross-chain DeFi refers to the ecosystem of financial applications that exist across multiple different blockchain ecosystems and can seamlessly exchange data and tokens between one another.

The Web3 ecosystem has become multi-chain, with a flourishing economy of decentralized applications existing across hundreds of blockchains, layer-2 networks, appchains, and other environments. While the launch of diverse sets of on-chain ecosystems has helped drive the adoption of trust-minimization as the new standard, it has also fragmented assets and applications across disconnected environments.

Cross-chain DeFi is a new paradigm of decentralized finance powered by cross-chain interoperability that enables fully cross-chain applications that can seamlessly exchange messages and tokens across distinct networks.

This article provides an overview of cross-chain DeFi, how it works, and how Chainlink CCIP is helping to unlock a new wave of cross-chain innovation.

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What Is Cross-Chain?

First, a quick explainer of why cross-chain interoperability is a critical missing piece from DeFi and the blockchain economy. Blockchains don’t have the native ability to communicate with external systems, which prevents them from communicating with each other and with existing Web2 infrastructure. Given the wide variety of blockchain ecosystems—with already more than hundreds of blockchains in operation and likely many more to be launched in the future—it’s critical that these on-chain environments are able to interoperate and communicate with each other.

Cross-chain interoperability protocols are a critical piece of infrastructure for exchanging data and tokens between different blockchains. Cross-chain interoperability enables a more integrated Web3 ecosystem and helps increase connectivity between existing web infrastructure and the Web3 economy.

Without cross-chain interoperability, each blockchain would be an isolated island unable to share resources or information—assets, applications, and market liquidity—with the rest of the ecosystem. Cross-chain technology helps create connections between these islands, enabling interoperability for applications and a more unified liquidity environment.

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Limitations in DeFi

DeFi offers tremendous potential for building a conflict of interest-free financial system underpinned by cryptographic guarantees. Yet the absence of robust cross-chain connectivity and interoperability makes realizing this vision challenging. Key challenges in a DeFi landscape that lacks cross-chain technology include:

• Constrained liquidity—DeFi protocols are critically reliant on liquidity. When liquidity pools are isolated across different blockchain networks, the ecosystem becomes divided, and liquidity is scattered across separate pools. DeFi’s potential lies in the creation of universal liquidity pools facilitated by standardized primitives like fungible and non-fungible tokens. In the absence of cross-chain interoperability, liquidity remains restricted to individual platforms, leading to isolated markets and hindered innovation.
• Siloed assets—The isolated nature of blockchains means that assets on one chain remain cut off from assets on other blockchains, creating fragmented ecosystems that hinder DeFi’s potential for adoption and the creation of natively composable financial applications. In a landscape with multiple distinct ecosystems, an application’s liquidity—like an automated market maker (AMM)—becomes dispersed across various blockchain environments. Consequently, each deployment has diminished liquidity, causing greater slippage for traders and decreased trading fee revenue.
• Reduced capital efficiency—Capital being confined to separate pools means it’s restricted to opportunities within its specific environment. Instead of accessing a comprehensive global liquidity pool, capital is limited, reducing market efficiency and hampering broader adoption.
• Limited scalability—With individual app deployments scattered around different blockchain environments, the scalability of the entire ecosystem is hindered.

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How Does Cross-Chain DeFi Work?

The secure transmission of data, tokens, and messages between on-chain environments enables the creation of cross-chain smart contracts—decentralized applications made using multiple separate smart contracts on different blockchains that communicate with each other to create a single unified application.

Cross-chain smart contract design is an emerging area of innovation with a variety of approaches. At a fundamental level, a cross-chain smart contract enables developers to segment their applications into separate modularized components that are deployed on different networks and perform different tasks, while staying in sync and supporting a unified use case. This modularity lets developers harness the strengths of various blockchains in a single application; for example, using a highly secure blockchain for its security while using a high-throughput blockchain for its low latency.

Given the current multi-chain landscape, where applications are individually deployed on separate blockchains, cross-chain smart contracts can be used to enable more seamless interoperability between deployments of the same smart contract code on multiple blockchain networks. This standardizes user experience across the multi-chain environment. Consequently, these contracts not only address the drawbacks of the present multi-chain design paradigm but also pave the way for entirely new smart contract use cases.

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Advantages of Cross-Chain DeFi

A DeFi ecosystem supported by secure cross-chain interoperability offers a number of advantages over the multi-chain design paradigm, including:

• Enhanced liquidity—By unifying multiple distinct blockchain environments, liquidity conditions are improved, as capital can tap into a broader pool of liquidity. With cross-chain integrations, capital is no longer confined to distinct networks. This bridges liquidity gaps, making markets more efficient and reducing trade slippage.
• Improved capital efficiency—The ability to effortlessly shift assets between chains allows capital to be utilized more effectively. This ensures it can be harnessed across a broader range of protocols and apps.
• Increased resilience—With resources and assets spread out, the risk of a single point of failure or targeted attack diminishes.
• Enhanced user experience—Secure and seamless cross-chain interoperability can enable a future where end users may not even be aware of which blockchain network they are interacting with. This user experience mirrors the traditional web experience, where users aren’t typically aware of the underlying cloud infrastructure or backend they’re using.

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Types of Cross-Chain DeFi

Lending

Cross-chain decentralized money markets enable users to deposit collateral in a lending market on one blockchain and borrow tokens against it from a market on another blockchain. Cross-chain lending allows users to keep their collateral on a highly secure blockchain while borrowing tokens on a higher-throughput blockchain to deploy into applications within that on-chain environment.

A cross-chain money market also helps standardize yields across different markets, thus enabling the creation of more sophisticated tools for hedging and lowering costs for borrowers on lower-liquidity money market deployments featuring higher borrowing interest rates. A user could borrow tokens from a market deployment on a blockchain featuring a lower interest rate, with the borrowed funds then bridged back to the chain where the loan was opened.

Exchanges

A cross-chain decentralized exchange (DEX) helps mitigate the liquidity fragmentation issues of the multi-chain design paradigm by offering users the ability to execute trades that source liquidity from token pools across different blockchain networks. As a result, accessible liquidity across all blockchain networks is significantly boosted, providing users with lower slippage and access to greater fees for liquidity providers on each chain.

Cross-chain DEXs can also be designed to enable users to swap native tokens on one blockchain for native tokens on a different blockchain without having to rely on wrapped tokens or centralized exchanges. For example, a user could trade ETH on the Ethereum blockchain for SOL on the Solana blockchain using a cross-chain smart contract.

权益质押

Cross-chain staking could allow users to stake an asset on one blockchain and receive rewards on another blockchain, broadening the scope of staking as a mechanism for securing blockchain networks and Web3 services. By incorporating multiple blockchain environments into the design of a staking mechanism, protocols can attract a broader pool of capital and access a larger user base.

Yield Aggregators

A cross-chain yield aggregator could deploy funds into various DeFi protocols that exist across the multi-chain ecosystem. This broader approach can allow users to earn higher rewards without needing to manually bridge their tokens across chains. Cross-chain yield aggregators can significantly reduce the friction of multi-chain yield farming, eliminating the need for manual transfers and thereby boosting liquidity across the multi-chain ecosystem.

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Chainlink’s Role in Cross-Chain DeFi

To accommodate the need for a secure and reliable cross-chain interoperability standard, Chainlink launched Cross-Chain Interoperability Protocol (CCIP) to enable data and tokens to seamlessly move across different blockchain environments and interact with existing web and enterprise infrastructure. With initial launch partners such as Synthetix for cross-chain synthetic assets and Aave for cross-chain governance, CCIP is being adopted across DeFi to enable new cross-chain use cases and increase the adoption of smart contracts.

CCIP is the most secure, reliable, and easy-to-use interoperability protocol for building cross-chain applications and services. Developers are given the flexibility to build their own cross-chain solutions on top of CCIP using Arbitrary Messaging, while CCIP also provides Simplified Token Transfers, enabling protocols to quickly start transferring tokens across chains using audited token pool contracts they control without writing custom code. CCIP also features additional safety mechanisms, such as customizable rate limits on token transfers and a separate Risk Management Network that monitors the validity of all cross-chain transactions.

CCIP is powered by Chainlink decentralized oracle networks, which have a proven track record of securing tens of billions of dollars and enabling over $8 trillion in on-chain transaction value. Since CCIP is built on the same foundation as existing Chainlink services, it requires little-to-no additional trust assumptions. If a dApp already relies on Chainlink for Price Feeds, then relying on CCIP for cross-chain interactions is an obvious choice.

CCIP has the potential to transform traditional single-chain or multi-chain applications into powerful cross-chain dApps across a wide variety of use cases, ranging from DeFi and NFTs to identity solutions, governance, and much more.

If you’re looking to integrate Chainlink CCIP, go to the product page. If you want to learn more about CCIP’s underlying architecture and code, check out the CCIP developer documentation.