Limited Interoperability

Note: Data in this section last updated September 12th, 2022

While Ethereum may have had a monopoly on the smart contract space in 2020, its share has been steadily eroded by the emergence of several new competitors. As such, consumers are now using multiple “alternative L1s” such as Solana, Binance Smart Chain, Avalanche, etc…

Ethereum is No Longer the Only Player in Town

Source: Defillama as of 9.12.22

While arguably good for the long-term health of the ecosystem, this explosion of smart contract platforms has created significant short-term problems. Perhaps most pressing is the problem of interoperability.

Because blockchains have different protocols, they cannot communicate or transact directly with one another. For example, you can’t directly buy an Ethereum NFT using a Solana token.

As such, the ecosystem has developed several “workarounds”, such as bridges, that appear to allow users to transfer tokens from one chain to another. Unfortunately, bridges don’t actually work this way and instead “lock” the tokens on one chain and create an entirely new set of tokens on another.

This means that if you want to swap 100 ETH tokens for 5,000 SOL tokens via a bridge, you’re actually doubling the number of tokens in existence. The original 100 ETH is “locked” on the Ethereum blockchain and 5,000 new SOL tokens are issued on the Solana blockchain.

While this isn’t in a problem in theory – as the average user can’t access these “locked” tokens – hackers frequently find ways to penetrate the system’s security and steal them. Indeed, in the first half of 2022 alone, criminals have stolen almost $2 billion from bridges!

Bridges are a Major Source of Crypto Hacks

Source: Elliptic

While some may argue that the solution to this problem is simply developing bridges with better security, others argue that it’s a Sisyphean task, as having hundreds of thousands of individual vaults containing billions of “locked” tokens will be impossible to defend and always serve as an enticing honeypot to hackers.

Even Vitalik himself argues that bridging is ultimately impossible, stating that while “the future will be ‘multi-chain’, it will not be ‘cross-chain’”.

While the jury is still out on whether it’s possible, there are nevertheless hundreds of talented teams working on creative and novel solutions to the interoperability challenge.

Given the likelihood of a multi-chain future, any protocol that can efficiently solve this problem will likely garner a 12-figure enterprise value.