Zetachain Part 2: The Opportunity Ahead for Omnichain Applications
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Layer 1 / L1
Zetachain Part 2: The Opportunity Ahead for Omnichain Applications
JAN 04, 2024 • 47 Min Read
Delphi Creative
Delphi Creative
CONTENTS
1 / 1 App Building Opportunities
1
1.1
1.1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.7.1
1.7.2
1.7.3
1.8
1.8.1
1.8.2
1.9
1.9.1
1.10
1.11
1.12
1.12.1
1.12.2
1.12.3
1.13
1.13.1
1.13.2
The following report is a “Case Study” produced by Delphi Creative and has been submitted as a guest... Show more
App Building Opportunities
Zetachain’s ability to support smart contracts and connect to heterogeneous chains – including the Bitcoin blockchain – opens the gateway to omnichain applications.
Omnichain apps are smart contracts deployed on the EVM-compatible Zetachain. While the application logic and state of omnichain apps entirely exist on Zetachain, they have the ability to directly manage foreign assets on supported external chains (Bitcoin, Ethereum, etc.). This paves the way for some novel applications that cannot exist in other environments.
If we look at the aggregator landscape today, they’re mostly DEX venue aggregators. There isn’t a lot of aggregation happening on other kinds of DeFi primitives or across multiple chains. Take the example of the 0x API or Matcha. Matcha can allow users to aggregate liquidity from various venues in a single ecosystem — but not across ecosystems.
When trading a spot pair like ETH-USDC, this doesn’t matter; all relevant liquidity sources are on Ethereum anyway. For tokens that have portions of its supply on various chains, the current cohort of aggregators do not help users tap into all available liquidity. With derivatives, cross-chain aggregation would result in superior trade execution quality.
Think of a protocol like GMX that exists on both Arbitrum and Avalanche. Arbitrum is GMX’s home chain, and this deployment facilitates far more volume than the one on Avalanche. However, trading activity and token volume on Avalanche are still meaningful.
GMX AUM Split by Chain
Liquidity Fragmentation Turns GMX Into Two Separate Apps
1
Traders on Avalanche have to make do with accessing just 15% of GMX’s global liquidity since 85% of the protocol’s AUM is on Arbitrum. There’s no way for traders on Avalanche to access this without bridging their collateral to Arbitrum and swapping some AVAX to ETH for gas.
For GMX token holders or LPs who earn GMX token rewards, liquidity on Avalanche is far less dense than liquidity on Arbitrum. This means to optimize for the best execution, GMX holders on Avalanche must bridge their tokens to Arbitrum. They cannot access the liquidity that sits on Arbitrum from Avalanche. And this is where Zetachain’s value proposition starts to take hold.
Essentially, GMX today is like two separate apps where the blockchains they are deployed on — Arbitrum and Avalanche — can bridge assets between one another, but the GMX contracts on each chain cannot communicate with each other.
Hypothetically, if a GMX hub was deployed on Zetachain with spokes on Avalanche and Arbitrum, it would be relatively simple to work in cross-chain swaps and margin trades.
In this section of the report, we are going to explore the most essential app-building opportunities that exist for Zetachain.
Omnichain DEXs
Let’s continue our example of a hypothetical GMX hub on Zetachain with deployments on EVM chains like Arbitrum, Avalanche, and others.
The primary GMX protocol is deployed on Zetachain. This is what controls GMX’s deployments across several chains. There is a global position management layer on Zetachain that takes care of margin requirements, risk monitoring, and even executing multi-chain liquidations. On each chain, there is an instance of the DEX with different baskets of assets that LPs deposit tokens to and traders utilize for liquidity. Some assets — like BTC, ETH, USDC, and USDT — will likely exist in each chain’s basket. But there will be differences. Arbitrum’s basket would have ARB, UNI, LDO, LINK, and CRV; the Avalanche deployment would have AVAX, JOE, and QI; and the Polygon instance would have MATIC, BAL, BAND, and RPL.
Unlike the state of cross-chain deployments today, with Zetachain used as the base layer for the protocol, you could achieve liquidity interoperability between all of these different deployments. For example, a user on Zetachain could post their margin to the hub contract and have positions on all three instances of GMX. This is a core assumption to cross-chain apps on Zeta — the position management layer would sit on Zeta, therefore users who want to take advantage of GMX’s full liquidity basket have to use Zetachain.
There are two key benefits here, barring execution quality:
The ability to split orders for an asset across various liquidity sources, similar to the MUX aggregator.
Access to more trading pairs without having to manually bridge to all relevant chains.
The smart contract on Zetachain can directly deposit the required amount of posted margin to the relevant chain with a message for how these assets are to be utilized i.e. open a 3 ETH long position. While this process is technically achievable without Zetachain, the UX improves considerably when the user only has to:
Interact with one chain.
Can globally manage their position instead of managing each leg individually.
It’s difficult to conceive of Uniswap, the DEX market leader, moving its base hub from Ethereum to any other chain. But theoretically, by deploying on Zetachain and utilizing the ZRC-20 standard, users could swap in and out of any asset (on any chain), and custody said asset on whichever chain they desire.
If a user is particularly tied to Arbitrum they could, for example, do their ETH-USDT and AAVE-ETH swaps using liquidity on Ethereum without ever moving off Arbitrum directly. The assets would move from Arbitrum to Ethereum and back via Zetachain. From a cost perspective, it obviously makes more sense to custody ETH and AAVE tokens on Ethereum itself. This example is simply meant to illustrate how a chain with native smart contracts and a bridge improves the experience of accessing cross-chain liquidity.
The UX of in-built bridging and smart contracts that can interact with each other across chains is far superior to the experience of manually bridging funds around to achieve a desired end-state. And this stands to significantly improve the UX around trading on DEXs.
