The Future is Multichain

Crypto twitter over the last few years has oscillated on the notion of 'the future is multi-chain’. The primary debate for some time however has centered on the adoption and product-market fit of the multi-chain ecosystem; the multi-chain future of the ecosystem is largely acknowledged.

The two key observations out of the ‘future is multichain’ discourse were;

1. The multichain ecosystem is ‘THE’ future especially now that the secure interchain messaging problem is largely solved

2. Key networks/ chain will remain focal points in the adoption of the multichain ecosystem especially around concentration of liquidity

Akin to the observations, the newly spun blockchain networks have faced challenges attracting sustainable liquidity due to the opportunity cost associated with providing liquidity on these networks.

If we shift the focus to the perspective of a DeFI user, key use cases that stand out in the multichain DeFI space are;

Capital Efficiency

Liquidity Pool design in DeFI protocols

DeFI protocols rely on pools for liquidity - more liquidity pools for the same assets means higher fragmentation of liquidity. One of the major improvements with UniV4 and Balancer v2 were shared pools to reduce liquidity fragmentation.

On the contrary, very few enhancements have been made in lending pool design to improve efficiency. Siloed pool designs provide major benefits in reducing risks primarily for long tail assets. However, for mainstream assets (ETH, BTC, USD and their key derivative assets), siloed pools further fragment liquidity without commensurate reduction in risk.

Composable Assets

A normie DeFI user faces a very steep learning curve while navigating across different chains, trying to find the right token/right bridge and the right yield opportunities. These yield opportunities often come at the price of security of assets (interactions with bridges, DeFI protocols on destination chains) as well yield on native chains.