
Interoperability
has
long
been
one
of
the
biggest
challenges
within
the
crypto
space.
Nikhil
Suri
is
the
product
lead
at
the
Wormhole
Foundation,
which
acts
as
a
steward
of
the
cross-chain
messaging
platform
Wormhole.
Prior
to
that,
Nikhil
was
a
software
engineer
at
Jump
Crypto,
Uber
and
PayPal.
The
ability
to
perform
cross-chain
transfers
is
critical
to
building
a
multi-chain
future.
To
this
end,
“wrapped
assets”
emerged
as
a
way
to
facilitate
transfers
between
blockchains
and
have
since
been
the
state-of-the-art
solution
for
users
and
developers.
However,
wrapping
assets
has
serious
limitations.
Interoperability
protocols
have
been
hard
at
work
iterating
on
newer
methods
to
“natively”
transfer
assets
between
blockchains
to
address
user
and
developer
concerns.
New
approaches
not
only
simplify
development
but
also
enhance
usability,
which
ultimately
creates
a
more
user-friendly
DeFi
environment.
The
state
of
wrapped
assets
Creating
wrapped
assets
has
historically
been
developers’
method
of
choice
for
bringing
assets
to
new
blockchains,
growing
their
user
base,
and
benefiting
from
unique
functionality
on
different
chains.
Wrapped
assets
are
tokens
that
represent
another
token
on
a
different
blockchain,
with
their
value
pegged
1:1
to
the
asset
they
represent.
Wrapped
assets
created
an
entirely
new
paradigm
in
decentralized
finance
(DeFi)
by
allowing
assets
to
be
used
on
networks
where
they
otherwise
would
not
exist.
For
example,
bitcoin
(BTC)
can
be
brought
to
the
Ethereum
blockchain
by
“wrapping”
it
as
an
ERC-20
token,
which
enables
bitcoin
holders
to
utilize
their
tokens
within
Ethereum’s
DeFi
ecosystem.
See
also:
Uniswap
Approves
Axelar
for
Cross-Chain
Interoperability
|
Video
Wrapped
assets
also
enabled
protocols
to
expand
to
new
blockchains
with
extremely
low
friction.
A
project
with
a
token
deployed
on
a
single
chain
could,
with
the
click
of
a
button,
expand
to
any
new
chain
by
deploying
a
standard
“wrapped”
representation
of
a
token
via
an
interoperability
protocol.
However,
this
low
friction
is
a
double-edged
sword.
Since
interoperability
protocols
deploy
wrapped
assets
on
behalf
of
a
project,
those
assets
are
non-fungible
between
different
interoperability
protocols.
For
example,
users
can
transfer
ether
(ETH)
from
Ethereum
to
Arbitrum
via
the
Wormhole
Token
Bridge,
Axelar
Token
Bridging
or
the
Arbitrum
Native
Bridge
—
but
each
route
results
in
a
different,
non-fungible
asset.
This
leads
to
liquidity
fragmentation,
worse
UX
and
sub-optimal
markets.
Another
drawback
is
that
tokens
do
not
always
behave
consistently
across
chains
or
retain
their
advanced
functionality,
because
wrapped
assets
are
owned
by
the
smart
contracts
that
create
them.
This
also
interferes
with
important
administrative
functions
such
as
upgrades
or
ownership
transfers.
Wrapped
assets
were
a
catalyst
for
the
initial
expansion
of
DeFi
into
a
multichain
ecosystem
and
will
always
have
their
place.
However,
as
protocols
mature
and
become
more
complex,
there
is
a
pressing
need
for
alternative
solutions
that
harmonize
disparate
token
deployments.
Native
token
transfers:
A
next-generation
approach
One
new
idea
gaining
traction
is
native
token
transfers.
This
involves
protocols
natively
deploying
their
canonical
token
to
multiple
blockchains
and
using
interoperability
layers
to
facilitate
on-chain
transfers.
In
comparison
to
wrapped
assets,
native
token
transfers
ensure
that
projects
maintain
ownership,
upgradeability
and
customizability
over
their
tokens
on
various
blockchains.
This
prevents
liquidity
fragmentation
and
means
that
tokens
can
maintain
their
unique
characteristics
no
matter
which
chain
they
are
transferred
to.
Perhaps
the
best
new
approach
is
native
burn-and-mint,
which
involves
burning
the
native
token
on
the
source
chain
and
minting
the
equivalent
native
token
on
the
destination
chain.
Take
the
burn-and-mint
model
is
Circle’s
Cross-Chain
Transfer
Protocol
(CCTP),
which
securely
facilitates
USDC
transfers
between
blockchains
via
native
burning
and
minting.
CCTP
has
enabled
Circle
to
enhance
user-friendliness
and
reduce
the
fragmentation
of
USDC
across
the
crypto
ecosystem
by
migrating
away
from
relying
on
wrapped
USDC
representations.
Cross-chain
liquidity
networks
offer
another
approach
to
native
token
transfers.
These
involve
a
network
of
market
makers
or
an
exchange
protocol
that
will
accept
the
native
token
on
a
source
chain
and
release
the
native
token
on
the
destination
chain.
For
example,
a
user
who
wants
to
transfer
ether
from
Abitrum
to
Optimism
can
send
it
to
the
liquidity
network
on
Arbitrum,
which
will
route
to
a
market
maker
that
completes
the
cross-chain
transfer
to
that
user’s
wallet
on
Optimism.
A
popular
example
of
the
liquidity
networks
model
is
Wombat
exchange,
which
uses
a
novel
protocol
to
facilitate
cross-chain
stablecoin
swaps.
This
model
is
especially
useful
for
tokens
that
cannot
be
minted
and
burned
on
demand,
such
as
ether
or
BTC.
At
the
same
time,
liquidity
networks
often
have
higher
fees
since
a
third
party
is
involved,
and
some
routing
mechanisms
can
suffer
from
MEV.
The
native
token
transfer
model
decouples
the
token
transfer
process
from
the
underlying
interoperability
protocol,
and
therefore
provides
projects
with
greater
flexibility.
This
enables
builders
to
configure
advanced
verification
and
setting
threshold
requirements
and
choose
between
different
interoperability
protocols.
A
step
towards
prime
interoperability
Native
token
transfer
frameworks
are
more
than
a
technical
evolution;
they’re
a
step
toward
realizing
the
full
potential
of
blockchain
technology.
They
can
serve
as
long-term
solutions
that
are
able
to
evolve
alongside
the
protocols
that
leverage
them.
With
wrapped
assets,
DeFi
protocols
were
able
to
quickly
expand
to
new
blockchains,
but
had
to
worry
about
lock-in,
liquidity
fragmentation
and
ownership
and
upgradeability
for
their
token
contracts.
With
native
token
transfer
frameworks,
protocols
can
still
benefit
from
rapid
expansion
while
focusing
on
what’s
important:
configurable
security
and
providing
themselves
with
the
ability
to
change
over
time.
As
we
move
forward,
interoperability
will
continue
to
play
an
important
role
in
shaping
a
robust
and
user-centric
DeFi
space
and
provide
projects
with
the
sovereignty
to
define
what
works
best
for
them.