Synthetic multi-bridge assets to diverisy bridge risk

Tech Talk
1

Problem
We need to import assets from other ecosystems to grow faster and attract more users.
The most relevant one is USD (we have been waiting for too long and need a solution that does not depend on Bitfinex or Circle launching on Substrate).

There are many debates about which bridge to use. Axelar, Nomad, Multichain, Wormhole, Celer, LeyerZero, Ren, … there are too many (and not all will survive the competition in the long run).

Clearly, the long term solution are light-client to light-client bridges. But, it might take months/years until they are ready and battletested.

We need a solution now.

Proposal

(using USD as example but works for any asset)

I think the best way would be to create a synthetic backed equally (or weighted) by the different USD representations, and call it dotUSD (or whatever).

To mint dotUSD, you lock USDx bridged from whatever bridge is supported.
dotUSD can then be used across protocols. The easiest way is to have MakerDAO like debt positions where you need to repay dotUSD to claim the underlying USD asset. Stability fees can be charged as a business model.

The risks of each bridge can be reflected by:

  • Higher collateralization rates (e.g. greater than 100%)
  • Collateral ceiling (how much USD from that bridge is accepted as collateral to mint dotUSD)

Why?

  • Concentrates liquidity rather than fragmenting between different bridges
  • If one bridge breaks, people that borrowed dotUSD against that bridge’s USD get liquidated. But the damage to protocols using dotUSD is limited. It will depend but only lose a fraction of the value backing it.

Each protocol can still chose to use 1 bridge over the other. But for those that chose to diversify, this approach reduces the funds lost from a bridge hack from 100% to e.g. 1/4th is it is split equally across 4 bridges (and perfectly balanced ofc).

It is not a perfect model - but feels much better than having 4+ different USD representations that are non-fungible… or, betting 100% on a single bridge and losing everything in case of a hack.

When using a MakerDAO-like Vault model, each Vault operator accepts the risk of the bridge they used. E.g. if I had used USD.mad to mint dotUSD, I would have been liquidated. Of course, there is damage to the overall system due to a depeg (e.g. 1/4th of the dotUSD is unbacked because USD.mad was 1/4th of the collateral) - but there is not risk of bank-run and people draining healthy USD from the protocol, like there would be in an AMM/pooled model.

PS: aUSD and other decentralized USD stables will co-exists with centralized stablecoins, just like DAI coexists with USDT and USDC. Interestingly, a protocol like aUSD could easily become dotUSD by selecting respective collaterals.

PPS: Once we have native USDT/USDC, the liquidity in dotUSD might slowly move over. But for other assets that are not native, this will still be useful. And who knows, maybe there is still use for it to exist in parallel to native USDT/USDC .

PPPS: Why not use stablepool LP tokens, e.g. Curve USD 4 pool with different bridge versions. Beacuse if one bridge breaks, people will drain the healthy USD versions for the broken bridge’s USD. The MakerDAO Vault model has Vaults isolated and prevents this.

2 Likes
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Hi Alexei,

a great idea and I wanted to add a couple of thoughts to it:

  1. Economically there would need to be some incentive for a user to mint dotUSD with some other stable coin rather than charging a stability fee. The minter bear the full depeg risk (total loss in the worst case) while not getting any upside (minting dotUSD with USD does not create any meaningful leverage, even at a 100% LTV ratio). Such an incentive could be paid from the xcm fees generated from cross chain transactions of dotUSD.

  2. Wouldn’t this be a great use case for a common good parachain where there is no need for a revenue model?

  3. The main permanent and meaningful depeg risk arises from protocol/bridging risk which is a tail event in terms of likelihood. Hence, collateralization rates of above 100% would only make this economically less attractive but not more secure. If a bridge gets compromised, the value of the stable coin is likely going to zero. The easiest and probably also most secure way would be to set an equal weighted collateral ceiling.

  4. In fact, ‘competitors’ such as aUSD could be integrated as collateral as well and as such, would likely even benefit from an adoption of dotUSD as it alleviates some of the protocol risk from individual stable coins and might be a more trustworthy choice in the short term until individual stable coin protocols got more battle tested.

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hi Alexei, i think having the collateral locked in Curve pools with synthetics minted on Polkadot is an interesting idea worth exploring further, and incidentally is one of Darwinia network’s primary use cases. I’d also like to add that Darwinia has already started rolling out light client based bridges for Polkadot and Kusama parachains, with routes interconnecting DOT<>KSM<>ETH (ie: Moonbeam <> Ethereum) rolling out in the next 60 days or so.
under the right circumstances, having liquidity pools or collateral on ETH provided or incentivized by the Dotsama community could not only help bootstrap liquidity DeFi in the Dotsama ecosystem, but also adoption of Darwinia bridgehub which closely adheres to Parity and W3F design principles, and one which we feel will meet or exceed the quality of any common good solution.

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Curve pools does not work - it must be a synthetic minting model with isolated Vaults.
Otherwise, if one bridge breaks affected users will drain the pool of assets from healthy bridges.

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