Connecting Distributed Ledgers: Surveying Novel Interoperability Solutions in On-chain Finance

Abstract

This paper emphasizes the critical role of interoperability in enabling efficient and secure communication for the fragmented distributed ledger ecosystem, particularly within on-chain finance. The purpose of this study is to streamline and accelerate empirical research on the intersection of cross-chain interoperability solutions and their impact within on-chain finance. The analysis examines the relationship between financial use and interoperability while comparing the properties of novel cross-chain interoperability protocols (LayerZero, Wormhole, Connext, Chainlink Cross-Chain Interoperability Protocol, Circle Cross-chain Transfer Protocol, Hop Protocol, Across, Polkadot, and Cosmos), focusing on their design, mechanisms, consensus, and limitations. To encourage further empirical study, the paper proposes a set of network metrics and sample statistical models and provides a framework for evaluating the performance and financial implications of interoperability solutions.

Figures (10)

• Figure 1: The diagram illustrates a cross-ledger liquidity aggregation from different on-chain finance liquidity hubs at the same time.
• Figure 2: LayerZero protocol is explained with the communication flow of a single transaction. Source: Zarich et al. (2021) Zarick2021.
• Figure 3: The architecture of the Chainlink's CCIP. Source: Chainlink CCIP.
• Figure 4: Illustration of canonical token transfer by using the Hop token as an intermediary asset. Source: Whinfrey (2021) Whinfrey2021.
• Figure 5: A diagram of Across architecture. Source: Across.