Fixing the Fragmentation of Web3

Fixing the Fragmentation of Web3

One of the most common ways around the fragmentation of blockchains and assets across Web3 is to use token wrapping, which enables assets created on one blockchain to be transferred to another blockchain network (We covered the different types of asset wrapping in Part 1: Token Wrapping & Custodial Asset Wrapping and Part 2: Non-Custodial Asset Wrapping).

While this allows chains to communicate, it only exacerbates the liquidity problem — locking up coins and assets within chains indefinitely.

Even worse, if there are multiple bridges between the same chains, the bridges produce different wrapped tokens, which are not interchangeable. Having multiple wrappings of the same token actually contributes to liquidity fragmentation — the main problem the bridges have been built to solve.

At Diversifi, we are building a new solution that tackles the interoperability problem without causing additional fragmentation. The Diversifi protocol provides seamless cross-chain interoperability without token wrapping.

The Diversifi Platform: How Does It Work?

Diversifi’s model to offer seamless cross-chain interoperability and exchange digital assets is via running a network of decentralized liquidity pools. By creating and managing liquidity pools across several Layer 1 and Layer 2 blockchains, value can be transferred 1:1 without relying on synthetic/wrapped assets or centralized players.

To avoid creating synthetic (“wrapped”) tokens on each chain, Diversifi will maintain liquidity pools on each integrated layer-1 blockchain (e.g., Bitcoin, Ethereum, Terra, or Solana). A user who wishes to send an asset (e.g., USDC) from one chain (e.g., Ethereum) to another (e.g., Solana), will send USDC to Diversifi’s USDC pool on Ethereum and withdraw USDC from Diversifi’s USDC pool on Solana.

The Diversifi blockchain uses committee-based consensus. Each committee consists of a rotating set of “wardens” whose role is to ensure the asset pools remain in sync since withdrawals from a pool on the destination chain are only authorized when corresponding deposits have been confirmed on the source chain.

Diversifi wardens run in a Trusted Execution environment control the asset pools on the destination chain through the use of Threshold Signature schemes (we’ll talk about this later).

The Diversifi protocol monitors and synchronizes assets across these blockchains via a decentralized liquidity management chain and provides a secure and straightforward mechanism for allowing users to perform cross-chain atomic transfers and swaps without token wrapping.

This example will assume that the Diversifi platform has established pools on three Layer-1 blockchains (A, B, and C). With Diversifi, users can transfer assets between addresses on:

• Blockchain A and B (i.e., exchanging USDC on Ethereum for USDC on Solana and vice versa)

• Blockchain A and C (i.e., exchanging wBTC on Ethereum for BTC on the Bitcoin Blockchain and vice versa)

• Blockchain B and C (i.e., exchanging wBTC on Solana for BTC on the Bitcoin Blockchain and vice versa)


How Does Diversifi Support Efficient Liquidity?

For Diversifi’s service to work well, all pools must have sufficient liquidity to support withdrawals and be adaptive to the market movements. The Diversifi protocol will monitor and take the following actions:

• If a pool receives several withdrawal requests, it should be replenished.

• If there is too much liquidity in the pool, it should be decreased to maximize capital efficiency.

• If there is a strong demand for withdrawals from a pool (i.e., Pool B), the other pools’ liquidity can be directed there to address demand.

The Diversifi chain will store up-to-date information on all pools and can optimally transfer assets between pools as needed.

In the following articles, we’ll talk about the Diversifi platform’s core security elements — Threshold Signature schemes and a Trusted Execution environment that help manage the liquidity pools and maintain the platform’s security.

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