As we find ourselves in the midst of another “crypto winter” — this one largely fueled by a slew of insolvencies, regulatory crackdowns, and inexorable macro headwinds — it is important that we not lose sight of the technological breakthroughs that catalyzed this last bull run and reintroduced the ethos of decentralization to the masses.

One theme from this past cycle that remains at the forefront of discussion amongst industry participants is the rise of interoperability. A topic frequently prognosticated during the 2017–2018 ICO era, communication between independent blockchains became a reality during this 2021–2022 period with the arrival of cross-chain infrastructure. With multiple funds having already published comprehensive guides on bridges and interoperability protocols (see 1kx and Zee Prime’s primers), we thought it would make sense to explore the next obvious topic in the cross-chain discussion: the long-term function of cross-chain infrastructure in our multi-chain world.

It is no secret that many today question the viability of natively cross-chain applications — most notably Vitalik Buterin who earlier this year stated: “security limits of bridges are actually a key reason why while I am optimistic about a multi-chain blockchain ecosystem…I am pessimistic about cross-chain applications’’. Though the answer to this debate is far from binary, we agree with the core of Buterin’s position and believe that unsustainable incentives across networks have led folks to overestimate the need for cross-chain dapps, while simultaneously underestimate potential security risks.

Make no mistake, cross-chain infrastructure has played an instrumental role in helping manifest our multi-chain landscape. However, the continued growth of the latter does not necessarily imply the endless utility of the former. There will likely be a niche of applications that benefit from cross-chain implementations (we discuss our framework for identifying these dapps and use cases we are excited about below), but as the market matures, we envision generalized cross-chain messaging protocols addressing a more acute issue within modular networks — that being broken composability between rollups. Our working thesis is that protocols currently building towards connectivity between heterogenous chains will likely see greater utility and risk-adjusted product-market fit by optimizing for intra-chain communication, and acting as a unifying thread in the fabric of modular blockchains.

The purpose of this piece is to explore our thesis in its entirety by addressing the following:

1. The Evolution of Bridges
2. The Current State of Bridges
3. Why the Current Excitement Around Cross-chain Is Misguided
4. Use Cases That Make Sense to Us
5. Closing Thoughts

The Evolution of Bridges

Note: this is a non-exhaustive overview of the interoperability timeline that provides the needed context for our thesis. For those already familiar with the cross-chain landscape, we suggest skipping this section and beginning with “The Current State of Bridges”.

Specialized Bridges: Asset-specific, Application-specific and Chain-specific Bridging Infrastructure

In their simplest form, bridges are systems that support the transfer of value between independent blockchains. The first centralized bridge came in the form of centralized exchanges (CEXs) using notary schemes to enable users to exchange assets between siloed networks. Shortly after, more on-chain native solutions began to arise, namely with BitGo, Kyber and Ren partnering together to port Bitcoin (BTC) onto Ethereum (ETH) in the form of Wrapped Bitcoin (WBTC). To provide a simplified explanation as to how this works, BitGo acts as the BTC custodian by first storing your Bitcoin and then issuing an erc-20 token that represents a synthetic version of that Bitcoin (i.e. WBTC) on Ethereum. BitGo periodically undergoes audits on its token supply by members of the WBTC DAO (i.e. Gnosis, Maker, Aave, Wintermute, etc.) to ensure alignment between custodied assets and circulating supply on the network.

WBTC and the efforts of its founding partners offer an early glimpse into the value and range of possibilities asset-specific infrastructure could unlock within adjacent networks. Since the arrival of WBTC, we have seen teams continue to innovate on this asset-specific bridge type, with the intent of minimizing trust-based interactions in the asset porting process. One such project that we are excited to be supporting is Interlay, a Polkadot parachain that uses an economically trust-minimized design to facilitate asset interoperability across DeFi, beginning with their flagship product interBTC. To summarize, interBTC represents a BTC synthetic backed by BTC held by custodians (or “vaults”) and insured by custodian collateral. The network’s incentive system dissuades custodians from engaging in malicious behavior by slashing their bonded assets if they lose or choose to steal custodied BTC. These game theory mechanisms create stronger, decentralized bridging alternatives for market participants to more securely engage in cross-chain activity.

Application-specific

Following asset-specific bridges came the emergence of application-specific bridging infrastructure, or bridges whose functionality is limited to servicing a single application. Thorchain, a decentralized cross-chain liquidity protocol first ideated in 2018 and launched in 2021, serves as an early example of this bridge-type. This cross-chain liquidity network, which takes the form of an L1 built using the Cosmos SDK, allows users to swap between native assets of differing networks in a trust-minimized and permissionless fashion — thus offering a decentralized alternative to traditional exchanging methods (i.e. CEXs).

Akin to the developer activity across the asset-specific bridging space, we are seeing teams continue to explore novel architectural designs to achieve application-specific interoperability. One notable name is Chainflip, a Substrate-based cross-chain decentralized exchange, which aims to reduce the frictions and centralization that presently exist with swapping native L1 assets. As an L1 itself, Chainflip leverages its own permissionless validator set to maintain contracts or “vaults” on each of its supported chains, creating what the team describes as a “decentralized Settlement Layer”. The Accounting Layer, paired with settlement, exists on the State Chain, an intermediate blockchain of sorts that runs the Aura proof-of-stake consensus system as provided by Substrate. Here, balances are tracked, events processed and instructions executed. The protocol observes activity on its supported L1s by running either full nodes or light nodes of each network, and uses multi-party-computation (MPC) to execute swaps after the validators of the State Chain reach consensus.

Chain-specific

While asset-specific bridges are often pointed to as the earliest instance of value movement between isolated networks, we began to see a stark acceleration in cross-chain activity following the arrival of chain-specific infrastructure. These are *relatively* trust-based, proof-of-authority bridges developed by core L1 teams that serve as conduits for the bilateral movement of assets between the sponsoring network and some other chain. Such infrastructure like the Avalanche Bridge, Polygon Bridge and Rainbow Bridge (Wormhole early on as well, but now it would be more appropriate to consider it a generalized protocol) has shown to be integral in unlocking value for both developers and end-users, respectively.

The Current State of Bridges

To recap, we have established that bridges have been integral to the movement of value between sovereign blockchains, and more complex cross-chain interactions are on the horizon with the rise of generalized interoperability networks. These solutions span the decentralization spectrum and take a variety of forms, each with a particular focus on either assets, applications, chains, or all of the above.