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Polkadot › Analysis
Bringing in high-quality assets to Polkadot
A successful public chain system needs to be supported by a vast asset scale and rich asset categories, and the accumulation of native assets is undoubtedly prolonged.
As an emerging public chain ecological cluster, Polkadot has shown its power. Through its excellent multi-chain slice architecture design, Polkadot has become the most anticipated alternative to Ethereum at present. With the bidding of the Kusama slot, smart-contract platforms like Moonriver (Moonbeam first network), Acala (Karura), and Shiden (Astar) have been put into use. These platforms give us a long-awaited low-Gas experience.
Although Moonbeam, Acala, Astar, and other smart-contract platform-type projects have achieved compatibility with EVM and can attract projects and ecological transplants from Ethereum, this does not directly solve the problem of asset introduction. A successful public chain system needs to be supported by a vast asset scale and rich asset categories, and the accumulation of native assets is undoubtedly prolonged. Bringing in high-quality assets from outside becomes a shortcut to quickly improving the platform’s experience.
We have seen many projects bringing external quality assets to the Polkadot ecosystem. These include ChainX and Interlay, (which brings in BTC), Chainsafe, Darwinia, and Snowfork, (which add Ethereum assets), Bifrost, and Stafi, bringing in PoS public chain Staking Equilibrium, (which plans to add DeFi lock-in assets), and Centrifuge, (which introduces off-chain assets). Some of these projects have already gotten Kusama/Polkadot slots, and some are in the bidding process. We will do a cut-through look at these projects.
BTC is the cornerstone of the blockchain world. BTC has gathered many staunch believers due to its unique status in the blockchain field and the profound ideas embedded in its architecture. BTC has had a dominant position in the crypto ecology regarding the market value, liquidity value, and user base. Currently, BTC accounts for nearly half of the market value of the crypto market. Therefore, newborn public chains often have a great incentive to introduce BTC to inject strong vitality into their ecology, and Polkadot ecology is no exception. The pioneers on this track are ChainX and Interlay.
BTC-anchored asset XBTC, a Polkadot ecology cross-chain project, was launched in May 2018 by ChainX. ChainX has developed a Bitcoin side chain based on Substrate. Late August 2021, ChainX launched a bid for a Kusama slot using the first-mover network SherpaX, which is still ongoing as of writing. After a successful bid, XBTC will use the SherpaX parachain as a vehicle to enter the Kusama ecosystem.
ChainX uses WASM technology to implement BTC light nodes on the chain for the first time and supports SPV verification of BTC transactions, enabling non-trust security in the XBTC minting process.
Since the BTC chain does not have Turing completeness, it is impossible to install light nodes to verify the contract. Multiple “trusts” will complete the destruction-unlocking process in the BTC redemption process through the majority vote on the chain. There will be a total of 15 oracles that will manage the escrow addresses through multiple signatures. ChainX will have 2 escrow addresses, a cold wallet address, and a hot wallet address to improve security, and the signature records will be open and transparent for community oversight.
ChainX is not satisfied with the current trust-based design and claims that its asset escrow solution will continue to evolve, with version 1.0 mentioned above, followed by versions 2.0, 3.0, and 4.0, moving step by step towards decentralization.
Version 2.0: XCLAIM mechanism is used to enable a distributed escrow solution.
Version 3.0: Changing the account control technology from multi-signature to private key partitioning.
Version 4.0: Let users hold a unique private key slice of the escrow account with a veto right. This design improves asset escrow security by allowing witnesses to be free from over-collateralization.
In 2016, in its white paper, Polkadot proposed establishing an interoperable relationship with BTC. In January 2020, Web Foundation commissioned Interlay to design and develop a BTC-anchored asset on Polkadot, based on XCLAIM. Therefore, PolkaBTC, developed by Interlay, can have an official Polkadot background. Later, PolkaBTC was renamed InterBTC.
Interlay has developed a BTC-Parachain using the Rust language and the Substrate framework, which is planned to be used as a parallel link into the Polkadot ecosystem in the future. In October 2021, Interlay’s pioneer network Kintsugi tapped into the Kusama slot and is connected to the Kusama network.
The deployment of BTC light nodes on the BTC-Parachain gives the BTC-Parachain the ability to verify BTC on-chain transactions. In the InterBTC system, numerous independently controlled BTC accounts are responsible for hosting locked BTC, called Vaults, and Witnesses are called Vault Administrators. Any entity can become a Vault Manager by pledging DOT in an amount proportional to the maximum amount of BTC that can be held in custody. When a user transfers BTC to a Vault, the BTC-Parachain verifies it and issues InterBTC to the user. When the user needs to redeem the BTC, the BTC-Parachian destroys the InterBTC, and the Vault Administrator returns the BTC to the user. Although each Vault is a separately controlled account, the 150% over-collateralization protects these Vault managers from mischief.
Users are required to pay DOT for casting and redemption, and the fee will be given to the Vault’s administrator as an incentive. If a Vault Manager attempts to steal the BTC held in escrow, the pledged DOT will be confiscated and compensated to the user who suffered the loss. The existence of the over-collateralization mechanism requires the system to be configured with a prophecy machine feed. Still, since InterBTC is not yet live, the provider of the prophecy machine has not yet been determined.
The Vault’s administrator is responsible for managing the escrow account and the Relayer function, which is responsible for transferring blockheads from the BTC chain to the BTC-Parachain.
The InterBTC system allows users to host their own BTC by creating their Vault, facilitating large liquidity providers who need to convert large amounts of BTC into InterBTC.
In addition to Interlay and ChainX, Ren Protocol has also developed an Acala version of RenBTC. With Acala as the vehicle, RenBTC will also be one of the BTC-anchored assets circulating in the Polkadot ecology.
Introduction of Ethereum assets
If BTC is the most successful digital asset, Ethereum is the most successful smart-contract platform. The Solidity language and EVM environment have become the most customary development tools for blockchain developers. As a result, there are many assets on Ethereum. Therefore, establishing a cross-chain bridge connected to Ethereum and supporting the inflow of Ethereum assets will undoubtedly bring a rich asset type to the PoC ecosystem. We will introduce three typical Polkadot-EVM cross-chain bridge projects: ChainBridge, Darwinia, and Snowfork.
Chainsafe, a Canadian technology company and global leader in Web3 blockchain protocol and infrastructure development, received funding from the Ether Foundation in late 2020 to become the maintainer of the Web3JS codebase, previously maintained by the Ether Foundation.
ChainBridge is a modular two-way cross-chain bridge developed by Chainsafe. ChainBridge enables asset delivery from the EVM chain to the SubStrate chain. In early 2021, Moonbeam announced that it would integrate ChainBridge to allow access to Ethernet assets.
Next, the general workflow for data and value transfer from Chain A to Chain B under the ChainBridge model.
Step1: The user locks the source chain asset through the bridge contract of Chain A enters the necessary information such as the target chain ID, and initiates a cross-chain request.
Step2: Relayer will listen to the cross-chain request from the source chain and transmit it to the target chain. And initiate a “proposal” for the cross-chain request
Step3: The Relayer team will vote on the proposal, and when the vote reaches the threshold, the bid will take effect, and after it takes effect, Relayer will create mapped assets for the user on the target chain.
We see that ChainBridge’s cross-chain security is secured by a multi-signature federation of Relayers, which has the advantage of more efficient cross-chain execution and the disadvantage of including an assumption of trust multi-signature federation that is not decentralized enough.
As of this writing, Moonbeam’s forerunner network Moonriver has secured the slot in Kusama and is bidding for the first slots in Polkadot, while Moonbeam’s integration of ChainBridge has completed testing and is about to go live. ChainBridge successfully connected to the Moonbase Alpha test network and the Ethereum Rinkeby test network during the testing phase.
As we know, the so-called cross-chain transfer of assets is the process of locking the source assets in the source chain and issuing the mapped assets in the target chain. The difficulty of this process is how to deliver the message. The source asset has been successfully locked in the source chain to the target chain in a trusted way. In ChainBridge developed by Chainsafe, this passing task is done by a set of multi-signatory signers, which, as mentioned before, contains trust assumptions. In contrast, we want a trust-assumption-free and decentralized scheme.
The decentralized scheme requires having both sides of the cross-chain deploy each other’s light node contracts, allowing the two chains to form a mutual side-chain relationship and to be able to verify the transactions of the other chain. But we also need to solve another obstacle. The light node contract needs to continuously store and update the blockhead of the other chain to have verification capability. Still, this process will have the problem of volume expansion and gas consumption. The Gas consumption for creating Ethereum’s light nodes on the Substrate side is still within acceptable limits. Still, the Gas fee on the Ethereum side is expensive, and deploying Substrate’s light clients is not economically feasible at all. For this reason, Substrate made an essential upgrade by integrating the Beefly module, which makes it possible to add an indispensable parameter for the block header of the Substrate chain, which is the MMR root. With this parameter, the Substrate light client on the Ethereum side can store only the latest block headers and delete the old ones, keeping them light.
Understanding the detailed principles involved requires some knowledge of the MMR root and ultra-light nodes. Those interested can delve deeper into the study, which this article will not expand.
Projects currently committed to decentralized technology solutions that will connect Ethereum and Polkadot, include Snowfork and Darwinia. Darwinia mainnet and its pioneer network Crab are bidding for the Polkadot slot and Kusama slot, respectively, while Snowfork will allegedly run as a public interest parachain of polkadot ecology. At present, Darwinia already supports the exchange of its native pass-through RING between Darwinia and Ethereum, and will subsequently open up a whitelist mechanism to gradually transfer tokens from Ethereum to Darwinia across chains. Snowfork has no disclosed information about its progress for now.
We found that there are also projects trying to connect to other EVM public chains other than Polkadot and Ethereum. Anyswap has supported asset passing from Moonriver to BSC and Polygon, and Wanchain has deployed a bridge between Moonriver and Avalanche.
Introducing Staking Assets
To avoid energy consumption, most emerging public chains have adopted a PoS consensus mechanism, and for PoS public chains, Staking is the key mechanism to secure their networks. In a healthy PoS network, the Staking rate will generally be around 50%. Therefore, Staking assets in the crypto world also account for a reasonably high share, especially after the launch of ETH 2.0 pledge. A large amount of ETH has become a Staking asset, and as of writing, the number of ETH involved in ETH 2.0 pledge is nearly 9 million (as of block height 13777179 ). The Polkadot ecosystem’s main projects that have committed to introducing Staking assets are Bifrost and Stafi, and both have coincidentally chosen to import Staking ETH first.
Bifrost is an underlying DeFi project dedicated to unlocking the liquidity of locked assets, which includes Staking assets from various public chains.
On December 1, 2020, ETH 2.0 chain pledges were opened. Shortly after that, Bifrost launched the vETH minting module, which supports users participating in ETH 2.0 beacon chain pledges through the Bifrost channel and receiving the liquidity derivative vETH. vETH, known as Voucher Ethereum, is Bifrost’s staking derivative for ETH 2.0, and is the first derivative in the Bifrost vToken series to be released. After two rounds of vETH Mint Drop, a total of 932 users minted 17,788 vETH. vETH was still an ERC20 asset at this time. vETH went live on AnySwap on December 1, 2021, supporting the cross-chain transfer of vETH from Ether to Moonriver, making Bifrost the first to enter the Staking derivatives in the Polkadot ecosystem.
On July 19, 2021, at 16:17, Bifrost successfully tapped into Kusama’s 5th slot and became a parachain to Kusama. Due to the unstable version of XCM and frequent iterations, Bifrost did not choose to launch vETH directly on the Bifrost mainnet. After XCM matures, Bifrost will issue vETH directly on the mainnet and let vETH circulate on more parachains through XCM.
Bifrost is working with Snowfork to launch more Staking derivatives for EVM public chains. In the future, Bifrost will also develop SubStrate generic Staking derivatives for Moonbeam, Kilt, Phala, and others. With XCM and SubStrate Common Bridge, Bifrost will also develop SubStrate common Staking derivatives to provide unlocked Staking liquidity for Moonbeam, Kilt, Phala, and other parachains, and even non-parallel Substrate chains.
In fact, from the perspective of introducing vETH, Bifrost may not need to bid on parachains at this stage; Bifrost is bidding on parachains more, to land its Slot Auction derivative, vsToken. Bifrost has already helped several parachains bid on slots through SALP and has minted 170,780 vsKSM and 731,161 vsDOT, giving Bifrost a clean sweep in the Slot Auction derivatives circuit.
StaFi is a node operator and the founder of the well-known node service provider Wetez. StaFi has a deep understanding of the pain point of unlocking staking assets for stakers. Therefore, the idea of creating a staking derivative has been a long time coming.
After opening ETH beacons with pledges, StaFi created the pledge derivative rETH. rETH will be awarded for ETH 2.0 staking through StaFi’s channel. 16,685 rETH have been minted as of this writing. rBNB/rSOL and many other Staking derivatives.
From a technical point of view, StaFi uses a multi-staking escrow to create derivatives, which includes an assumption of trust in the multi-staking escrow holder. However, until the cross-chain bridge technology matures, this is the faster way to implement it.
The StaFi chain was created on Substrate, but no plans have been announced for bidding on slots. According to the StaFi team, their main focus is creating more Staking derivatives of the public chain. It will bid for the Kusama/Polkadot slot at the right time in the future to bring many Staking derivatives into the Polkadot ecosystem.
In addition to the above two, Acala had also planned to develop a product called Homa, which also aims to create Staking derivatives on Polkadot. However, this product is not Acala’s core business, and nothing new has been disclosed for now.
Introducing DeFi Locked Assets: Equilibrium
Equilibrium is more ambitious and wants to do direct cross-chain DeFi, importing DeFi-locked assets on Ethereum or other public chains directly into Equilibrium parachain, and then introducing the PoC ecosystem.
Equilibrium will support locking collateral on Ethereum, lending stable coins directly on Equilibrium, or other assets, such as pledging ETH, lending DOT. Equilibrium will also support depositing on Ethereum and closing interest redeeming on Equilibrium. In addition, Equilibrium will also have built-in cross-chain DEX to support direct exchange of Ethereum assets and PoC assets, and will also support complex cross-chain margin transactions in the future. Equilibrium’s cross-chain will be implemented based on existing cross-chain bridges, and projects such as Chainsafe and Snowfork will become Equilibrium’s infrastructure.
Of course, the Substrate-Ethereum cross-chain bridge and the cross-chain DeFi platform built by Equilibrium are two-way, supporting the import of external assets while supporting the outward flow of Polkadot assets, which is beneficial for the larger blockchain ecosystem. Still, we are not sure about the superior performance of the SubStrate chain and the development of the Polkadot ecosystem. However, we are confident in the excellent performance of the SubStrate chain and the development speed of the Polkadot ecosystem.
As of this writing, Equilibrium’s first network Genshiro is bidding for the Kusama slot, and Equilibrium is offering a very competitive incentive to win the Kusama slot.
Introducing an off-chain asset: Centrifuge
Centrifuge is a protocol dedicated to importing real-world underlying note assets onto the chain and into DeFi. Centrifuge’s first network, Altair, got the 11th slot in Kusama on October 13, 2021, at around 3:53 pm, becoming a parachain.
Centrifuge’s founding team believes that there are gaps where traditional financial systems fail to reach user demand. For example, the $2.1-2.6 trillion credit gap facing small and medium-sized enterprises globally, or the approximately $30 trillion in unpaid invoices locked up in supply chain systems that cannot flow globally. The latter is precisely the market Centrifuge wants to revitalize.
Centrifuge’s solution consists of two main steps: first, real assets are transformed through the Centrifuge platform into a non-homogenized standard token format, NFT, so that the underlying instruments representing the real assets can receive some representation of value.
In a second step, the possibility of obtaining liquidity funds based on NFT collateral can be realized by lending stablecoins by overcollateralization of various NFT assets through the application Tinlake on Centrifuge.
Tinlake is a DApp released by Centrifuge that allows you to borrow “money” against future revenue payments, including unpaid notes, or unrecorded copyright revenue on streaming platform Spotify, using NFT as a vehicle to lend stablecoin or other backed assets.
Although the process of mapping assets from off-chain to on-chain is still centralized and includes trust assumptions, Centrifuge has taken the first step of off-chain assets on-chain by starting with relatively robust supply chain finance notes, which deserves our continued attention. Off-chain asset on-chain is not an easy task, and if there is a model breakthrough, it will bring dramatic changes in the industry.
Each of the above projects, making efforts in their direction, are like a tentacle extended by the Polkadot ecosystem, receiving all kinds of high-quality assets.
The two projects connected to the BTC chain, Interlay main network, are not yet online, and its first network Kingtsugi has just won the slot.
Projects to connect Ethernet chains are slower, Chainsafe’s connection to Moonriver has just completed testing, and Snowfork and Darwinia are both opening up in a limited and cautious way. However, the difficulty of creating decentralized cross-chain bridges has been broken, and it is believed that soon Ethereum assets can be transferred into the Polkadot ecosystem without any obstacle.
Staking derivatives-related projects are developing rapidly. Bifrost has become a mint bringing 17,788 vETH and Stafi contributing 16,685 rETH to the mint and various rAssets. However, limited by the immature XCM, Bifrost has already introduced vETH into Moonriver through liquidity advance agreements like Anyswap; whereas StaFi chose to focus on creating more types of Staking derivatives first and not shoot slots for now. In the future, as XCM matures, Staking derivatives will be deeply integrated into Polkadot DeFi.
Equilibrium’s desire to create cross-chain DeFi directly and Centrifuge’s desire to import off-chain assets are arguably very bold, if not somewhat radical, attempts. Although the products are not yet live and ready to be experienced, they have whet our appetite.
We are happy to see these projects and hope that more quality assets will enter Polkadot in the future to energize, accelerate its launch, and benefit every builder and believer of the Polkadot ecosystem.