The Intelligent Insurer #64: Fragmented liquidity poses a major problem to DeFi growth
The DeFi industry has gone from under $1 billion in total value locked (TVL) to over $200 billion TVL in barely two years. With several next-gen protocols pushing the DeFi 2.0 dream, the industry is still battling with issues limiting its growth. Solving these key issues one at a time will unlock the key to the next wave of DeFi development.
In the latest Intelligent Insurer, we consider the current state of cross-chain composability and one protocol committed to promoting it. We will also analyze the effects it would have on the DeFi landscape, any potential risks, and how investors can continue to protect their assets. Firstly, we bring exciting news from our development team.
Insured Finance software development update
In the past week, we ran additional tests on our codebase and completed a few remaining tasks in preparation for mainnet launch. We have tentatively earmarked the end of May to launch our mainnet and will shortly follow up with announcements regarding the final date.
We have completed development on the claim voting escalation process. This will allow the escalation of failed claims to the INFI board of advisors. We are presently deliberating on making a video of the process to show the community how it works to better educate everybody.
While working on the smart contract coverage feature that will be implemented on the mainnet, we organized the codebase to boost efficiency. We did this by splitting the code into smaller contracts and running tests on each of them on the testnet.
We are currently developing new features within the smart contract failure coverage. Overall, we’re extremely excited for the next few weeks and hope to announce exciting news to our community soon!
The present state of cross-chain composability
In DeFi, cross-chain composability unlocks the massive potential of protocols by breaking down the walls between multiple siloed blockchains. In other words, it enables interoperability.
In an ideal DeFi system, digital assets can move seamlessly across multiple chains, wallets, and DeFi protocols. But the present DeFi landscape is far from ideal. For the longest time, Ethereum has dominated DeFi activity. However, Ethereum’s dominance has recently been countered by the proliferation of innovative DeFi protocols on other blockchains, including Solana, Avalanche, Polygon, and more. This influx has resulted in increased DeFi activity but presented a new problem.
The siloed state of blockchains has fragmented liquidity into different ecosystems. This makes it very difficult for DeFi users to transfer assets across blockchains and for developers to build applications on multiple chains. The solution is to create a protocol that can enable a fast and secure transfer of value between different blockchains, which is easier said than done.
Developers have tried several ways to overcome this issue, including creating bridges. However, this has recently been questioned in the light of several attacks. In February, the Solana-based blockchain bridge, Wormhole was hacked, with the attackers making away with over $375 million worth of ETH. The next month, Axie Infinity’s side chain Ronin Network suffered a major exploit that resulted in $625 million in losses. A few different approaches on how to effectively get every blockchain to become connected have been explored and one project is closer to making that goal a reality.
Cross-chain composability protocol pTokens unlocks every blockchain
With cross-chain composability at its core, pTokens are unlocking the enormous potential of DeFi by tearing down the walls separating blockchains. The pTokens cross-chain composability solution was originally developed by Provable Things and powered by the decentralized network, pNetwork. pTokens are ERC-20 versions of non-Ethereum blockchain tokens. They help token holders maximize their asset’s liquidity and facilitate multi-chain interoperability.
This cross-chain composability feature is made possible via pToken’s Trusted Execution Environment (TEE) solution. The TEE is a hardware isolated sandbox that interacts with the two blockchains users are looking to transfer assets between. The TEE is set up so that it can transact the swaps between any two chains in a way that is fully auditable and secure, since no one can access its inner workings thanks to encryption. To further increase security, pTokens use a multi-TEE approach where multiple different TEEs and operators ensure there is no central point of failure.
Presently, pTokens connects several major blockchains, including Bitcoin, Ethereum, BNB Chain, Telos, EOS, and Polygon, with more integrations underway. All pTokens are transparently pegged 1:1 to their underlying assets. To send a token from one blockchain to another, users must deposit a certain amount of the underlying asset on the relevant pTokens smart contract and request an equivalent pToken.
Once the request is made, the two blockchains involved will meet within the TEE, where the smart contracts verify the amount of digital assets locked and mint new pTokens. Thus, if a user deposits BTC, they will receive pBTC. These pTokens can be redeemed at any time by burning them to unlock the underlying asset.
The pToken cross-chain composability solution is becoming very popular among DeFi users. With more and more assets supported, users will find it easier to start getting involved in multiple decentralized applications (dApp). According to data from DeFiLlama, the pNetwork currently has a TVL of $90.58 million.
Digital asset security still a major need
While there is still much to do, the existence of protocols like pTokens and the pNetwork are setting the pace for broader integration of cross-chain composability solutions. If these projects can develop to a point where virtually any asset can move across chains, one of the biggest hurdles to making DeFi user-friendly will be eliminated.
However, since these projects are still new and involve several technicalities, DeFi users will find it difficult to utilize them. They need to be simplified to enable the average DeFi user to participate.
Investors must take time to learn more about these innovative projects that are solving some of the biggest issues in DeFi. Additionally, the large amounts of digital assets moving on cross-chain composability protocols make them a prime target for criminals. While these projects try to provide the highest level of security they can afford, investors must take extra caution.
Hence, it would be wise to add an insurance product to their portfolio, such as those offered by Insured Finance. This protects investors’ assets from unexpected incidents that could otherwise result in losses.
About Insured Finance
Insured Finance is a decentralized, peer-to-peer insurance marketplace. Users can request customized insurance on a wide variety of digital assets, thereby ensuring full protection. Those fulfilling requests can earn premiums and earn a competitive return on their capital. Claims are fully collateralized and settled instantly.