Exploring Owlto Finance: Addressing the Cross-Chain Interoperability Dilemma

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The Rapid Evolution of DeFi and Fragmented Liquidity

Since the introduction of Ethereum rollups with Arbitrum and Optimism, a multitude of Ethereum Layer 2 solutions has emerged in just over a year. The replicability of technology has made launching chains as easy as a click, leading to over 50 chains based on OP Stack’s Superchain and more than 50 Layer 3 solutions via Arbitrum Orbit in various developmental stages. Additionally, hundreds of other Layer 2 solutions leveraging zk-rollup technology are also thriving.

This proliferation of Ethereum Layer 2 solutions has led to an unavoidable issue: each Layer 2 operates independently, competing for Total Value Locked (TVL) and fragmenting Ethereum’s liquidity. Liquidity remains a persistent theme in Web3, and we currently find ourselves in an era where disparate public chains contribute to dispersed liquidity. Vitalik Buterin has vividly described this situation on Twitter, highlighting that as Ethereum has overcome numerous challenges and skepticism, the current dilemma lies in the excessive fragmentation of operations between Layer 2 chains.

Looking beyond the Ethereum ecosystem, competition exists among various Layer 1 chains as well, including Solana, Sui, and BSC, forming a multi-chain landscape where Ethereum holds a leading position while other chains orbit around it. Each Layer 1 ecosystem has also birthed promising Layer 2 solutions.

For instance, since the surge of inscriptions last year in the Bitcoin ecosystem, dozens of notable Layer 2 solutions have emerged, alongside various Appchains, SVM Rollups, and sidechains in Solana, and multiple Layer 2 solutions taking shape in BSC and other chains. With limited capital in the crypto space spread across so many chains, it’s evident how fragmented liquidity can become.

The Cross-Chain User Experience: A Challenge

Current cross-chain bridges can facilitate asset transfers but often result in poor user experiences. Users face several hurdles:

Cross-chain operations need not be this complicated; a liquidity solution is essential.

A Unified Cross-Chain Liquidity Approach

Imagine a protocol that simplifies transaction processes, allowing users to submit a request based solely on their trading intent. The system would then automatically aggregate liquidity from various chains, enabling efficient asset conversions with minimal friction costs. This could significantly alleviate the fragmentation issues among public chains.

Owlto Finance, a cross-chain interoperability protocol, has released a new technical white paper on October 30, 2024, titled “Intent-Centric Cross-Chain Liquidity Trading,” aiming to address the challenges of cross-chain liquidity in DeFi. With this approach, users will no longer need to grapple with complex cross-chain procedures; they will only need to input their intent, and the system will automatically integrate liquidity across chains for optimal asset conversion and minimized transaction costs.

This innovative solution is poised to greatly enhance user experiences, providing a decentralized, secure, and transparent trading environment while achieving the best transaction costs and time efficiency through unified liquidity pools.

Phase One: Integrating Cross-Chain Liquidity through Interoperability

Within just a year of its establishment, Owlto Finance has emerged as a leader in the cross-chain bridge sector, boasting over 2 million users across more than 200 countries. It ranks among the top three in cross-chain trading volume on DefiLlama, with a peak market share of 33%.

Owlto aims to create a comprehensive interoperability solution for Web3 users, enabling seamless asset flow across chains. Achieving this goal is no small feat, so how has Owlto accomplished it?

Owlto has established cross-chain liquidity pools that enhance interoperability between different chains. For users, greater interoperability means accessing a wider range of chains and a richer landscape for asset circulation. By bridging various ecosystems and connecting EVM and non-EVM heterogeneous chains, users can move funds from Chain A to Chain B with minimal friction, thereby increasing the efficiency of asset circulation and utilization in DeFi.

Owlto’s cross-chain liquidity pools have already addressed this need, integrating over 50 networks and facilitating asset liquidity flow among Ethereum, Bitcoin, and Solana ecosystems. This has expanded the use cases for assets across different networks and increased potential yield opportunities. To date, Owlto has enabled over 1.6 million cross-chain transactions on Bitcoin Layer 2 and around 8 million on other chains, with a total user base exceeding 2 million.

Furthermore, Owlto has improved user experience through enhanced cross-chain speed and security. Approximately 90% of cross-chain transactions can be completed within 30 seconds, with an AA rating from CertiK security audits.

Owlto’s cross-chain DEX aggregator functions as an information tracker, identifying the best liquidity pools across different networks to facilitate lower-slippage trades, thus avoiding high slippage issues caused by limited liquidity in single pools. Owlto has deployed this DEX aggregator function on about 20 chains, bridging liquidity between different tokens.

Through these measures, Owlto Finance has achieved comprehensive integration of liquidity pools across multiple chains, enhancing the depth and efficiency of cross-chain trading. Specific initiatives include:

Phase Two: Ensuring the Security of Cross-Chain Asset Flow through ZK and Node Security Verification

“Decentralization” and “security” are always the foremost principles in the crypto world.

While effective solutions for cross-chain liquidity issues have emerged, problems related to “security” and “privacy protection” in the cross-chain space still need to be addressed. According to DefiLlama, over $2.8 billion has been stolen from cross-chain bridges, accounting for nearly 40% of the total stolen funds in the Web3 industry.

Therefore, the transmission and storage of transactions require high security to prevent tampering or theft. Although on-chain transaction transparency is high, it can also expose users’ trading intentions, leading to privacy risks.

To tackle the issues of “security” and “privacy protection,” Owlto is introducing the following two solutions:

  1. Node Security Verification: A decentralized solution can effectively prevent single points of failure, enhancing the security of asset flow between different networks. Owlto’s “Node Security Verification” utilizes staked tokens based on decentralized consensus and incorporates a “node penalty mechanism” and “node incentive mechanism” to ensure data security. If a node transmits fraudulent data, its staked tokens will be penalized (Slashing mechanism). Conversely, nodes that actively participate and execute honestly will not only earn additional rewards through staking but also receive transaction fee shares and token incentives for successfully executing trading paths. This design ensures that nodes maintain honest behavior in a decentralized environment and prevents malicious activities.
  2. Zero-Knowledge Proofs: The introduction of “zero-knowledge proofs” ensures that verifiers can confirm user intent and execute transactions correctly without knowing specific transaction details. If an attempt is made to transmit a forged protocol, the generated commitment will fail verification, ensuring the security of the entire transaction process while protecting user privacy. Additionally, during the verification phase, zero-knowledge proofs prevent Miner Extractable Value (MEV) attacks, enhancing the overall security of the system.

Furthermore, Owlto Finance is committed to improving the efficiency, security, and user experience of cross-chain bridges through specific measures, including:

Phase Three: Implementing Intent-Centric Cross-Chain Liquidity Trading Using AI Technology

Owlto Finance will introduce an intent-centric trading model, which differs from traditional trading methods by not being limited to a specific path for transaction completion. Instead, it allows for transactions through any path as long as the expected outcomes meet user constraints.

Within this framework, users only need to sign a transaction intent, expressing their expected outcome. Protocol nodes are responsible for evaluating different liquidity providers across multiple blockchain networks, including decentralized exchanges (DEXs) and market makers.

Using smart routing and algorithms, nodes will select the optimal cross-chain liquidity path, ensuring that the transaction result aligns with user intent. During this process, users’ assets will be held in smart contracts, with funds released to liquidity providers only upon successful transaction completion, ensuring the safety of user funds.

For example, suppose a user wants to convert 1000 USDT on Ethereum to BNB on BNB Chain, aiming to receive at least 1.2 BNB. After submitting the transaction intent, the protocol will analyze data and market conditions using AI algorithms to find the best path across various chains.

A potential process might involve first converting USDT to ETH on Arbitrum, then transferring ETH to BNB Chain, and finally exchanging ETH for BNB on BNB Chain. Once the nodes identify the optimal path, the transaction will commence. This approach can more effectively utilize liquidity pools and favorable exchange rates across chains, while reducing transaction costs and time.

In the above “intent-centric cross-chain liquidity trading” model, AI plays a crucial role:

Through these measures, Owlto Finance aims to enhance the intelligence of liquidity management and trading path optimization using AI technology, specifically including:

Conclusion

Currently, DeFi still faces many inconveniences and security risks, and the crypto industry is not yet ready to serve billions of users. Owlto’s vision is to create an intent-centric cross-chain liquidity protocol that integrates intent, zero-knowledge proofs, smart contracts, and AI technology.

Through trading split algorithms and smart trading routing algorithms, Owlto aims to help users achieve optimal liquidity across multiple chains and select the best paths to reduce transaction costs, addressing the complexities of cross-chain transactions and the issue of insufficient market liquidity in a secure and decentralized manner.

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