Intro
The number of blockchain platforms today proves that technology plays an essential role in achieving a decentralized Internet, Web 3.0. In this case, the unhindered exchange of information and access to it in several blockchain networks without intermediaries is the most crucial aspect of decentralization. And, unlike cryptocurrencies, the interoperability or compatibility of blockchains covers a much wider range of uses.
Blockchain is more than just a way to store or exchange protocols. Recently, the technology has aroused great interest because it is the basis for Bitcoin and Ethereum and promises a revolution in various fields.
Nevertheless, progress is impossible without first achieving the level of functional interoperability.
In this article, we will look at the Stargate project, which provides a novel solution to the interoperability problem of blockchain networks. We will analyze what goal the project pursues, what problem it solves, and what features it provides.
What Is Stargate?
Stargate is a revolutionary project that can completely solve the interoperability problem of blockchain networks with a unique solution built around the LayerZero protocol. The Stargate project allows users to transfer various assets from one blockchain network to another without using wrapped tokens and similar solutions. Currently, Stargate supports seven chains, such as Ethereum, Polygon, Avalanche, Fantom, BNB Chain, Arbitrum, and Optimism, and five tokens — USDC, USDT, ETH, BUSD, and STG. In addition, the developers promise to add support for Solana, Cosmos, and Terra blockchain networks.
Stargate developers pay attention to the fact that the current solution for the cross-chain transfer of digital assets has several drawbacks. Firstly, users wishing to make a cross-chain transfer of their native tokens receive wrapped (intermediary) tokens in return. In addition, when transferring large volumes, popular cross-chain bridges cannot provide instant guaranteed finality. To better understand what problems the project solves, we suggest you dig a little into the essence of the work of cross-chain bridges and wrapped tokens.
How Do Wrapped Tokens Work?
A wrapped token is a tokenized version of another crypto asset. That is, the price of the wrapped token is pegged to the price of the original asset, such as BTC and wrapped BTC (WBTC). A user who wants to transfer the assets from chain A to chain B turns to the custodian. The user deposits the native asset (BTC) and receives an equal amount of WBTC in return. The custodian holds the user’s assets until they want to redeem their native assets. As soon as the user redeems the native asset, the custodial burns the previously minted wrapped tokens.
The wrapped token also has disadvantages. First, it does not allow genuine migration from one blockchain to another. The presence of a third party is necessary; therefore, additional costs are required. Therefore, the security and reliability of the wrapped token depend entirely on the custodians because they are the ones who store user funds.
In addition, a wrapped Bitcoin or other token does not have all its functions. Bear in mind some exchanges do not accept a wrapped token for staking or farming.
Stargate allows you to eliminate all the listed problems. Using the LayerZero omnichain communication protocol and the unified liquidity pool, the platform allows for seamless and instantaneous transfer of native tokens from one chain to another in a single transaction. Thus, the network fees are reduced, and security is increased due to the absence of intermediaries.
Bridging Trilemma
Today, dozens of independent blockchain networks operate in the crypto space (Ethereum, BNB Chain, Solana, and others) and many sidechains. Each of the independent chains has its own native token and token standard. Each chain has an ecosystem of projects supporting its token standard. And each of these chains is inherently incompatible with the other. This problem is one of the key ones in the crypto space, and various options are being developed to solve it, from multi-chain networks to cross-chain bridges. Multi-chain networks, such as Polkadot and Cosmos, are a topic for a separate article, so we will not consider this solution. But cross-chain bridges are one of the most popular solutions that allow you to reduce the fragmentation of the blockchain space and give users the freedom to work in different DeFi protocols (not limited to one chain).
Nevertheless, despite all the advantages of cross-chain bridges, they cannot fully solve the problem of interoperability and compatibility of blockchain networks. By analogy with the well-known Blockchain Trilemma (decentralization, scalability, and security), cross-chain bridges have their own Bridging Trilemma. This trilemma describes the compromises the developers of cross-chain bridges have to make to optimize the structure of their work. Here they are:
- The use of wrapped tokens instead of cross-chain transfer of native tokens, which, as we have already mentioned, are not characterized by high liquidity, security, and cost-effectiveness;
- Most cross-chain bridges cannot provide instant guaranteed finality, especially with large volumes;
- Low liquidity and, consequently, the impossibility of a cross-chain bridge to adopt many blockchain networks.
The Stargate project intends to solve the Bridging Trilemma by implementing a Delta (∆) balancing algorithm and a unique cross-chain bridge mechanism — ∆Bridge. Thanks to these innovations, Stargate users can conveniently, cost-effectively, and instantly transfer native tokens from one chain to another without the need for wrapped tokens. Furthermore, as part of Stargate, all integrated blockchain networks share a unified liquidity pool, which allows the protocol to achieve instant guaranteed finality and irreversible transactions. In addition, thanks to this approach, Stargate can adopt many blockchain networks without sacrificing scalability.
Stargate Token and Features
STG is the native token of the project that performs utility and governance functions. The token has a maximum limited supply of 1 billion units, of which more than 133 million are in circulation. Users can earn passive income by adding STG to the staking pool or providing liquidity. In addition, token holders who deposit their STG tokens to the staking pool receive, in return, the voting escrow veSTG tokens that display their share in the pool and the voting power. Users who lock their STG tokens for the longest possible period receive more veSTG and, therefore, more profit and voting power. Due to this, the circulating supply of STG is reduced, stimulating the token price growth and the protocol’s long-term success.
Speaking about the opportunities that the project provides, they boil down to the fact that users can make native transfers, provide liquidity, receive passive income via yield farming, as well as stake STG:
- Transfers. The protocol allows instant and secure cross-chain asset transfers between 7 chains. There is no network fee if you want to transfer the native STG token from one chain to another. If you want to transfer other supported tokens, you pay a fee of 0.06%. 0.045% is sent to liquidity providers on the destination chain, and the remaining 0.015% is sent to the project treasury.
- Liquidity pools. Users can provide liquidity to one of 15 liquidity pools and receive a reward from each STG transfer. The reward is paid with stablecoins and depends on the user’s share in the pool.
- Farming. Liquidity providers can deposit their LP tokens into farming pools and receive a tempting APY. At the time of writing, there are 15 farming pools. Top pools bring about 5% APY, depending on the token and chain.
Closing Thoughts
Interoperability is the most promising way to utilize blockchains for corporate purposes and maximize blockchain investments fully. It seems to be a logical step in integrating numerous protocols and cryptocurrencies at various levels of interactivity. It will also provide opportunities for collaboration and the exchange of ideas. The benefits of blockchain interoperability can be huge once a secure and reliable solution is found. And it seems that the Stargate project can become exactly this solution.