What opportunities are there for cross-chain bridges in the Ethereum PoS era?
The arrival of the Ethereum staking era may bring a new perspective to the breakthrough development of cross-chain bridges.Author: AaaahWeb3
In mid-September 2022, the Ethereum execution layer and the proof-of-stake consensus layer triggered the merge mechanism at block height 15537393, producing the first PoS block. Since then, Ethereum has officially abandoned the PoW consensus model in favor of PoS.
On May 8, according to data from the official Ethereum website, the beacon chain ETH staking APR (annual percentage rate) has reached a high of 7.69%, with the current total amount of staked ETH approximately 17,915,432 coins (about $3.25 billion), and the number of validator nodes is 561,951. Historical data shows that the Ethereum ETH staking APR generally maintains around 4%, previously breaking 5% at the end of March and reaching a high of 6.44% in late April.
According to the design of Ethereum's consensus mechanism, validators who participate in staking and perform signature tasks normally will earn rewards, incentivizing users to stake Ethereum and participate in network consensus, making the network more decentralized and enhancing its security. The Merge will impact the Ethereum ecosystem and even the entire blockchain landscape, but the industry generally believes it will not change the trend towards a prosperous multi-chain future.
As the infrastructure connecting Ethereum and other multi-chain ecosystems, cross-chain bridges are also an essential part of the DeFi trend, attracting significant market attention. Various cross-chain projects have emerged and are very popular. At the same time, hacker attacks on cross-chain bridges have been frequent, primarily due to the increasing number of cross-chain users and growing liquidity, which locks a large amount of funds in cross-chain bridge contracts. Additionally, due to the complexity of asset cross-chain logic, the security of most cross-chain bridges needs further enhancement. The continuously increasing Total Value Locked (TVL) makes cross-chain bridge projects happy about the increase in user numbers, while also prompting thoughts on how to manage the locked funds.
The arrival of Ethereum 2.0 staking may bring a new perspective to the development of cross-chain bridges.
Detailed Explanation of Ethereum Staking Reward Mechanism
According to the design of Ethereum 2.0, users must stake at least 32 ETH on the execution layer to be included in the validator list. Validators randomly selected by the beacon chain through the randao mechanism will be assigned various roles within each cycle, completing the signature tasks associated with those roles to earn rewards.
The main consensus roles and rewards for staking distribution include:
- Proposer: Packages block data, earning a portion of the rewards for each valid attestation and SyncCommittee signature included in the block. Based on current staking data, the reward for producing a block is approximately 0.028 ETH, and each validator is assigned a block-producing role approximately every 61 days. Additionally, the proposer will receive transaction fees from the execution layer corresponding to the block, minus the burned portion.
- Attester: Needs to perform attestation for the assigned slot. After the cycle ends, rewards are calculated based on the attester's attestation data. According to current staking data, each active validator completing the attestation task as per the protocol earns approximately 14,506 Gwei per cycle, which is about 0.00326 ETH per day.
- SyncCommittee: Signs the slots within the assigned synchronization period, earning rewards once packaged into a block. According to the protocol, 512 validators are randomly selected as SyncCommittee members every 256 epochs to sign the slots during the synchronization period. Based on an estimate of 440,000 validators, each validator is selected as a SyncCommittee member approximately every 977 days. The reward for completing the signing task in each synchronization period (256 epochs) is about 0.119 ETH.
In addition, if some validators fail to complete their corresponding role tasks, their rewards will be reduced, and they may even have part of their balance deducted as a penalty. If some validators engage in malicious multi-signing behavior, they will be penalized with a significant balance deduction and will no longer be able to earn rewards. Furthermore, validators can choose to exit voluntarily.
Challenges Faced by Cross-Chain Bridges
As Ethereum and other emerging blockchains develop rapidly, cross-chain bridges, as the infrastructure of multi-chain ecosystems, have encountered some bottlenecks. Ethereum founder Vitalik has pointed out the fundamental security limitations of cross-chain bridges. According to the current mainstream design of cross-chain protocols, during the cross-chain process, users lock the assets they wish to transfer into the cross-chain bridge smart contract on the original chain. The cross-chain bridge then unlocks the corresponding cross-chain assets from the liquidity pool on the target chain for the user or mints a corresponding amount of mapped assets to send to the user, while charging a fee to cover network transaction costs.
According to this design, as user cross-chain activities increase, cross-chain liquidity also grows, and cross-chain assets are locked into the cross-chain bridge contract, contributing to the cross-chain bridge's TVL. For example, if a user transfers ETH from Ethereum to BNB Chain for DeFi activities, the user's ETH assets on Ethereum will be locked in the cross-chain bridge's smart contract on Ethereum, simultaneously increasing cross-chain liquidity. The corresponding locked assets can only be unlocked when the user transfers back from another chain to Ethereum.
Most DeFi activities require staking or have a certain locking period, leading to an accumulation of assets locked in contracts on Ethereum. As the amount of user assets crossing out increases, the TVL continues to rise, attracting more and more hacker attacks. In early 2022, the Wormhole cross-chain bridge was attacked, with hackers extracting $300 million. A few months later, the Nomad cross-chain bridge was found to have improperly initialized parameters in its contract, introducing verification vulnerabilities, resulting in $200 million being extracted. Data from Chainalysis shows that by the end of the first three quarters of 2022, 69% of hacker attack losses came from cross-chain bridge projects.
Figure: Distribution of hacker attacks, source: Chainalysis
At the same time, as the DeFi ecosystem matures and evolves, various cross-chain projects have emerged, leading to increasing competition. Cross-chain bridges, besides continuously integrating new projects and providing cheaper cross-chain services, lack new attractions to retain users.
In response to the challenges faced by cross-chain bridges, Cross Chain To Earn may be a new solution to the problem.
Opportunities Brought by Ethereum 2.0 for Cross Chain To Earn
If cross-chain bridges can reasonably utilize locked assets, they can provide additional rewards for cross-chain users on one hand, attracting more users to the project, and on the other hand, disperse funds to avoid the concentration of large amounts of funds that invite frequent hacker attacks. In conjunction with Ethereum 2.0 PoS staking activities, cross-chain bridges can reasonably utilize the cross-chain assets locked by users on Ethereum. While ensuring normal cross-chain liquidity, they can stake a portion of the locked ETH in Ethereum PoS and distribute the staking rewards to cross-chain users. Users can earn not only the originally intended DeFi activity rewards on the target chain but also additional PoS staking rewards allocated by the cross-chain bridge. If the PoS staking activities also incorporate MEV, the rewards will be even higher.
This DeFi approach allows cross-chain bridges to participate in Ethereum 2.0 consensus activities, helping to enhance the consensus security of the Ethereum network while attracting DeFi users to engage in cross-chain activities through staking rewards. At the same time, locking a portion of the TVL in Ethereum staking contracts can mitigate the risk of becoming a target for hacker attacks. Even if a hacker attack occurs, it can prevent the entire TVL from being maliciously extracted.
Figure: Ethereum cross-chain bridge Asset Ranking, source: dune.com
According to statistics from dune.com, the value of ETH assets (ETH or WETH) locked in cross-chain bridges on Ethereum has reached nearly $1 billion. Excluding additional MEV rewards, staking in PoS could yield $76.9 million annually.
If this solution is implemented, cross-chain bridges will need to interface with various network staking activities. In addition to their own cross-chain protocols, they will also need to enhance liquidity management, staking activities, and profit distribution logic. This will make the overall solution for cross-chain bridges more complex and raise higher requirements for protocol security and product design.
The main challenge points involved in the solution include:
- Reasonable liquidity management to avoid affecting the large cross-chain demands of cross-chain users due to reduced liquidity from staking activities.
- Stability of staking activities, ensuring that staking activities proceed normally to avoid financial losses due to performance issues leading to staking penalties.
- Protocol security, as the overall solution becomes more complex, ensuring the security of the protocol to avoid introducing new security vulnerabilities.
- Reasonable profit distribution, as cross-chain users have considerable freedom, requiring a reasonable distribution of their entitled staking rewards based on their specific cross-chain funding cycles.
Based on this solution, cross-chain bridges can also provide direct staking pool services, allowing users to lock assets in the cross-chain bridge contract to participate in the PoS network staking activities offered by the cross-chain bridge to earn rewards.
The blockchain industry is advancing rapidly, and cross-chain bridges, as the infrastructure linking multi-chain ecosystems, continuously face new challenges while providing users with stable and convenient cross-chain services. They are also constantly seeking new opportunities and breakthroughs. If cross-chain bridges join network staking activities, they will become more closely integrated with the blockchain network itself and DeFi users, creating more possibilities and interoperability.
Reference:
https://ethereum.org/en/upgrades/merge/
https://beaconscan.com/https://ethereum.org/en/staking/
https://beaconcha.in/charts/pools_distribution
https://blog.chainalysis.com/reports/cross-chain-bridge-hacks-2022/
