The past two weeks on Twitter have been full of discussions about bridges, hacks, and of course the hottest new innovation on the block: Stargate Finance. While many have been excited about it being a solution to the “Bridging Trilemma,” I feel the general consensus has misunderstood its true potential. More than just a secure bridge, Stargate has the potential to be a highly composable DeFi lego that plugs into many other protocols.
Bridges and Existing Issues
For those newer to the crypto space, let’s first try and understand what a bridge is. Think of a bridge as the infrastructure that allows a user to move their data or tokens from one blockchain to another. It provides the connection between two different blockchains to facilitate a transfer. Bridges are necessary because blockchains cannot directly communicate between each other without a bridge acting as a middleman. With an increasingly expanding DeFi space, bridges have been vital for the development of a multichain landscape. There’s a multitude of reasons for why anyone would want to use a bridge, such as moving assets over to a chain with cheaper gas fees. On Ethereum mainnet it can cost upwards of $50 to swap between tokens, while as on Polygon it is usually pennies. Users may also bridge assets in order to use a protocol that does not exist on their current chain, or just to chase a higher APY.
The issue with existing bridges is that they require multiple steps to get the desired tokens on the destination chain and they face the challenge of the “Bridging Trilemma.” When designing a bridge, creators have only been able to successfully prioritize two out of three important aspects of bridging: Instant Guaranteed Finality, Unified Liquidity, and Native Assets.
Instant Guaranteed Finality: the guarantee of funds on the destination chain when a transaction is successfully committed on the source chain
Unified Liquidity: the shared access of a single liquidity pool between multiple chains
Native Assets: the user-desired assets (native or most liquid synthetic) on the destination chain
Most existing bridges rely on a ‘lock and mint’ or ‘burn and mint’ mechanism, where the bridge either locks or burns the assets on the source chain to mint the assets on the destination chain. While this method achieves instant guaranteed finality, it fails to provide the native asset. Instead, it mints a wrapped or synthetic version of the asset on the destination chain. Native assets are extremely important because many bridges mint their own forms of wrapped assets on the destination chain, resulting in the fragmentation of assets’ liquidity.
Other bridges can prioritize unified liquidity and native assets by allowing the chains to share access to each other’s liquidity pools. However, this method can fail the instant guaranteed finality test at times if a chain requesting a transaction is slower to execute than a competing chain requesting the same transaction. This is a massive issue because it requires the bridge to revert the transaction from the source chain, which can cost gas that the bridge may have to cover itself. If bots use this mechanism to target a bridge, they can drain the bridge of its funds, making it unusable.
Speaking of exploits, in recent history the Wormhole bridge was hacked in February, by an attacker finding a fault in the validator approval required for transactions. Since Wormhole relied on the lock and mint mechanism, the hacker was able to trigger unauthorized mints into their account and made off with 120,000 ETH on Solana. By solving the “Bridging Trilemma” Stargate is able to reduce its risk profile compared to other bridges by limiting its potential for exploitation.
Layer Zero
Stargate is able to solve the bridging trilemma because it is built on top of Layer Zero, a trustless omnichain interoperability protocol. I understand that may make absolutely no sense to many people, as it did to me the first time I read it, but let’s break it down piece by piece. Foremost, it is trustless, which means that it does not rely on a single centralized source to approve messages or hold funds. In essence, this results in no single point of failure, since the trusted third parties are smart contracts, not people. Next, ‘omnichain interoperability’ means that it allows for different blockchains to share and communicate data amongst each other. Lastly, it is a protocol that allows for other dApps to be built on it, such as Stargate, so that dApps can leverage the omnichain communication channels created by Layer Zero.
How does Layer Zero achieve this? Great question. They introduced the novel idea of running an Ultra Light Node (ULN), on each chain that Layer Zero connects to. Existing competitor models either run an on-chain light node or use a middle chain. On-chain light nodes receive and validate every block header for each chain pair. Middle chains are an intermediary used to validate and forward messages between chains, which introduces a single point of failure risk. Middle chains may allow for consensus corruption that can end with all of the liquidity stolen, while on-chain light nodes can cost millions per day to run if Ethereum is one of the chain pairs. Ultra Light Nodes benefit from the security style of on-chain light nodes, but save the exorbitant costs required to run them by relying on an oracle to stream the block headers when needed rather than constantly.
Layer Zero allows for each protocol built on top of it to choose the oracles they desire for moving the block headers from one chain to another. This is great because it adds an extra layer of security by separating the oracle and relayer such that if one is compromised, the transaction won’t be validated since the relayer that moves the actual transaction proof from chain a to b executes independently.
Stargate
Finally, with the background info provided I can move onto the exciting stuff. As I mentioned before, Stargate is a bridge that solves the bridging trilemma, but it’s also a decentralized stable coin exchange since you can go from USDC-USDT on the same chain, or cross chain. Plus, you can earn swap fees by depositing your stablecoins into single sided staking vaults to earn swap fees and the native STG token. Regardless, it truly is a DeFi lego.
Implications & Random Thoughts
For example, Sushiswap already passed a signal vote to implement the Stargate bridge into Sushiswap to allow for omnichain swaps. Imagine going from AVAX on Avalanche to MATIC on Polygon in one click on Sushiswap, by converting the AVAX to USDC on Avalanche, then using Stargate to swap for USDC on Polygon, which is finally traded for MATIC on Sushiswap. This is the type of innovation that can lead to mass adoption because of the simplicity. A massive barrier to entry for many new crypto users is the sheer complexity. The 3-click rule states that if a user cannot find what they are looking for on a site within 3 clicks, they’re likely to become frustrated and leave. Every aspect of DeFi needs to be simplified so that the average person can be easily onboarded, and while they may never understand what the heck an omnichain interoperability protocol is, they don’t need to!
One of the most exciting aspects about Stargate is that it can be implemented into existing platforms. In the future we may see Stargate implemented into yield aggregators to allow for seamlessly entering and exiting new positions across a multitude of chains to chase the highest APY. If protocols choose not to implement Stargate, they can also leverage Layer Zero’s technology by building atop of Layer Zero and wrapping its tokens with the proprietary Omnichain Fungible Token (OFT) smart contracts. This gives huge freedom to protocols for how they wish to expand, whether it be using Stargate for the backend support, or by making their own tokens omnichain. STG was the first omnichain token wrapped with the OFT, but there’s nothing stopping future protocols from wrapping their own tokens. I see this as a huge narrative in the future, through which protocols take the initiative to make their tokens omnichain rather than allowing bridges to make wrapped versions of the token, which turns the native assets illiquid and fragments the synthetic liquidity.
Getting really imaginative with it, if Curve were to implement Stargate into the protocol, all stablecoins would be able to maintain their peg more effectively since the unified liquidity pools across chains would simplify arbitrage opportunities to maintain an equilibrium across all chains. Even crazier, an OHM fork with actual stable emissions could build upon Layer Zero, and wrap its native token with an OFT, allowing for an omnichain reserve currency that could become essentially a reserve currency for not just Ethereum, but all blockchains.
Before I start rambling on about any more wild and half-baked ideas, I’ll end there and let your imagination do the rest.
The growth has been rapid, as Stargate is already the 11th highest protocol ranked by total value locked, with over $4.1B deposited on the protocol. The main takeaway here is that Stargate is not just another bridge, it truly is a DeFi lego that can be incorporated with your favorite existing protocols. People rant that the fully diluted value of STG at over $3B is excessive, and I’d agree if Stargate was just another bridge, but it’s not!
Author is a Decentralized Finance (DeFi) intern at Polygon, highly interested in accelerating the adoption of DeFi and NFTs in a sustainable manner. Also, currently studying finance and business analytics at Boston College - Carroll School of Management, while being actively involved in the BC Blockchain Club. Can be reached on twitter@offdeblockchain