On crypto twitter if you are tapped into the chainlink community, your feed is likely plastered with institutional logos and screenshots of SWIFT pdfs explaining the monumental transition of TradFi onto Chainlink’s Cross Chain Interoperability Protocol (CCIP). I resonate with content like that. I’m excited about securing trillions in value. That’s on my hinge profile.
But turning around to Web3, the world of code and crypto teams who are already chainlink’s customers: how does CCIP contribute to their projects? What motivates the Synthetix and Aaves of the world to work on CCIP integrations?
In a multi-chain world, CCIP lets a protocol reach more users with its services, accelerating its growth.
Consider the following facts:
Trading in small, illiquid pools on a DEX gets you less tokens for the same eth because of slippage + price impact.
For lending protocols, small supplies of an asset cause supply APY and borrow APY to fluctuate, creating uncertainty for lenders and borrowers.
Its liquidity all the way down, and why TVL remains a key metric for DeFi.
In the picture above, a protocol originating on Arbitrum can fund its Optimism expansion, and grow this local pool over time. For example, Uniswap has
3.44b TVL on Ethereum L1
2.11b on Arbitrum
108m on Optimism
147m on Polygon
This is a mature, distributed DEX. Still, the steep fall off of TVL on Optimism and Polygon leads to vastly different swap and LP experiences.
The good news is its smart contracts and brand exists on Arbitrum, with plenty of users. CCIP distributes the service to a wider audience. After bringing its smart contracts to Optimism, CCIP lets users transfer value between Arbitrum and Optimism in a self-serve fashion. The new Optimism users get to enjoy the protocol benefits, and their demand for the asset draws from the original pool on Arbitrum.
“Fragmented liquidity” is commonly brought up as an UX issue within the Ethereum L2 discussion. Global liquidity (unified liquidity) is its inverse.
We make the case that CCIP enables global liquidity for the protocol; the UX of any chain based on this liquidity is comparable with that of the original chain. This wider distribution of services acquires new users.
The insight that a leading protocol like Aave can use its existing brand and services to multiply its user base by acquiring them from any CCIP chain, is The Cross-Chain Opportunity. We quantify this investment signal later.
In a DeFi world integrated with CCIP, a cross-chain growth strategy will be tablestakes.
Synthetix is the first customer of CCIP. Synthetix’s fee paid over time and cross chain activities are reported on ccip.live.
Its sUSD is a stablecoin backed by SNX token collateral on Optimism.
To make sUSD available on ethereum L1, Synthetix uses CCIP to transfer sUSDs onto L1 instead of defining a new sUSD for ethereum. In the Synthetix V3 architecture, assets backed by the same collateral pool of SNX tokens on Optimism can be sent and used on many chains.
Now, with the initial integration of Chainlink CCIP, Synthetix is able to create shared collateral across multiple chains*. *
… In the future, Synthetix has the ability to expand the cross-chain Synth Teleporter functionality to additional EVM-compatible chains, including Arbitrum and Base. Synthetix is also exploring the usage of Chainlink CCIP for additional use cases, including cross-chain synthetic perpetual futures, cross-chain staking pools, and more.
When feature complete, both collateral and minted assets are each a global pool to interact with. The result is way more users across CCIP-compatible chains using Synthetix than previously possible, transferring tokens like they are one big happy family on the same blockchain.
The Aave ecosystem has the vision of growing its internal GDP - that’s how founder Stani Kulechov presents the Aave future. CCIP will boost this GDP by making blockchain boundaries go away.
GHO is a collateralized stablecoin like sUSD. In addition to Aave collecting governance votes cross-chain, Aave’s GHO stablecoin will use CCIP (interview video) to get GHO into more cross-chain use cases. Dapps in the Aave ecosystem will facilitate demand to the same set of GHOs, and what you can do with GHOs cross-chain will be quite expressive / complex.
Stani Kulechov notes
By using, for example, CCIP, you can create an action that happens in another network but you initiate it from the source network and the idea there is just to purely bring more composability and flexibility to what people are building.
He’s referring to the CCIP capability of transferring value with the instructions on what to do with this value. The design space for cross-chain dapps should match that of normal dapps, but a cc-dapp can send / get assets from other chains. In sum:
Bridge funds directly through Aave
Deposit on chain X, borrow on Y
GHO is backed by an unified pool of collaterals
Now that’s global liquidity.
How much growth from this opportunity is possible?
For one, large protocols with high intra-chain volume (transactions in the same blockchain) serves an established user base with recognized brand and reliability. It will leverage cross-chain distribution the most, realizing the most growth using its proven formula. For two, protocols that are multi-chain already, ie present on multiple chains, but needs secure, “omni” infrastructure to transfer value between chains.
The amount of progress in realizing this opportunity is cross-chain volume. This is the sum of transactions done through bridges and interoperability solutions, where source and destination chains are different. As a metric:
Some Web3 teams today leverage interop solutions and native bridges to good effect. The technical difficulty behind interoperability has led to many hacks and stolen funds in recent years. For the majority of projects this ratio remains near zero.
For example, if Synthetix cannot bridge sUSD, expanding to a new chain means deploying an independent sUSD contract and SNX collateral contract. UX of the new chain is poor, and does not get assistance from the origin chain (first picture of this article).
When cross-chain volume approaches intra-chain volume, the way that the protocol is used ignores blockchain boundaries.
Continuing the example, this means it is just as common for a user to move sUSD in the same chain as across chains. The flow of the sUSD resource generally does not care which ledger its arriving at or leaving from. Given a user and the chain she’s on, her UX is optimal as far as sUSD availability is concerned.
What about cross-chain friction like CCIP fee and cc-latency? If the user wanted to use the service from her chain, and experienced UX benefits that surpass this friction, that’s added cross-chain demand.
When cross-chain volume approaches intra-chain volume, the protocol serves users optimally at every CCIP connected chain.
In the diagram below, x-axis is intra-chain volume, roughly how big a protocol is. Y-axis is cross-chain volume, or progress. We make progress by going upwards. Using Aave as example, this is illustrated by the pink Aave arrow, which traces the path of growing cross-chain volume.
This continues until the blue dot, where just as much value flowed between chains as within individual chains. This the point of optimal multi-chain growth.
Why is the opportunity arrow not pointing vertically up? After transitioning to a cross-chain ecosystem, the Aave user base may opt to cross-chain transact rather than transact natively, leading to some cannibalization of services. For example, when assets are on L1, but user activities move to a high throughput L2.
A larger challenge is many chains will be duds that introduce few marginal new users, so there is likely an upperbound on cross-chain volume that prevents it from achieving parity with intra-chain volume.
As more Web3 teams integrate CCIP, ccip.live will present this growing metric as part of investment and trade signals.
Did we mention CCIP makes the protocol resilient to chain-specific congestion and risk? That’s for another time.
Thanks to @DefiDrew for insights and feedback.
... and link the world.