Wormhole: New Cross-Chain Liquidity for Solana

Elizabeth Barnes
August 11, 2021
4
minute read

Wormhole was initially introduced to us in 2020. Now, audited and live, SOL and ERC 20 token holders can transfer their assets between ecosystems. With Wormhole V2 in development, Solana will have their own native bridge to bring liquidity from Ethereum and soon Terra into their ecosystem to aid developers in their quest for more DeFi application users and a more robust Web 3 experience.

Introducing Wormhole

Solana's Wormhole Bridge was first introduced by Certus One back in October of 2020. It is a native bidirectional bridge that only goes from Solana to Ethereum. Users can move ERC-20 tokens across to SOL and back. 

Wormhole is a native L1 bridge. It is bidirectional - meaning that it only connects two networks directly, opposed to Comos's IBC or a cross-chain liquidity bridge, like Connext or Axelar. Solana and Ethereum need to rely on this bridge to accurately represent ERC-20 and SOL tokens, including the record of withdrawals and deposits. 

How It Works

Wormhole wraps ERC-20 tokens and transfers them across the bridge into Solana for more network usage.

Wormhole uses decentralized cross-chain oracles that track and broadcast when users lockup their tokens and burn them on one chain. These oracles also track when users mint or release new tokens on the other. 

Oracles (called guardians) perform the identical computation after observing an on-chain event and sign an approval. Transactions need a 2/3rds majority of the oracles to be considered valid by all Wormhole contracts. 

Once oracles sign this approval, it is posted on Solana for data availability. This transaction can either be immediately executed on Solana or the original user who triggered the transaction and submit it to Ethereum. This will start a burn/mint event. 

If the user sends their tokens to Ethereum, they will have to pay for that transaction fee themselves. If a user is sending their ERC 20 tokens to Solana, they will have to pay a slightly higher rent fee on the account. 

Very quickly: Rent is a separate amount of tokens on a user's account. Solana "collects rent" in two ways: when a transaction references it, and periodically once an epoch. Ethereum and new Solana users can read more about rent here

Bridge Background

For users to transfer tokens across chains, one token must be destroyed on one side. This burn and mint process prevents dilution and avoids the messy business of the bridge figuring out how to store and track those tokens. 

On the other side, the bridge must mint the new token at the same value as the tokens that were just burned. This process allows bridges to have precisely the same amount of tokens for each transaction. Bank tellers only keep a certain amount of cash in their drawer, and when they're out, they have to go to the vault for more cash. In this case, bridges don't keep cash at all. Instead, they take one value on one side of the bridge, burn one token, and mint the same value on the other side. 

Transaction Volume and Additional Liquidity

Solana needs the additional help from other networks to increase their DeFi use cases. Due to Solana's high throughput, they have an emphasis on small transactions. Higher speeds mean that validators can process an increased number of transactions in a block. This contrasts with Ethereum, where there are only so many transactions in a block, driving up gas prices and taking time to process transactions. 

Because of this high throughput and emphasis on small transactions, applications like video games and streaming platforms have had a lot of success and benefit from Solana's microtransactions. 

Serum is a decentralized exchange with an on-chain order book built on Solana. This bridge will allow Serum to reach its full potential. Serum's on-chain order book means processing transactions at higher speeds than DEXs that use off-chain order books. Unlike AMMs, having an on-chain order book means that traders have more control of their transactions, and since the information is kept on-chain, no AMM is acting in the middle of transactions to track and broadcast off-chain data.

More Cross-Chain Functionality = More Adoption

With this bridge to Ethereum, Solana should see more users bringing their ERC-20 tokens into Solana's ecosystem. Solana is an L1, meaning that it is a layer one protocol, allowing developers to use Solana's features to build applications. 

There are sustaining projects connected to Solana and will benefit from further exposure to more users accessing their services. Akash will interact with Solana by running smart contracts on Solana's quick platform using AKT to pay for services. The Graph will be adding Solana's blockchain added to the indexing and query layer, facilitating developers who want to build with Solana and help dApps respond to cross-chain events. 

Economics

There is not a Wormhole staking token, nor any economics. In PoS, validators are elected for consensus based on the amount of delegated tokens. Once elected, validators add blocks onto the chain.

In this circumstance where bridges use oracles, there are not blocks being made to add to a chain. Oracles don't make blocks, they broadcast off-chain transactions on-chain. Oracles' most common application is in the use of algorithmic stablecoins or on DEXs, where oracles broadcast an off-chain price (like fiat) from centralized exchanges to the chain to keep accurate records for trades (on DEXs) or aid in informing stablecoin applications (like UST and cUSD). 

There is no token with Wormhole or incentivizing people to run oracles for the bridge to function. 

Wormhole V2

The Wormhole V2 design will allow third parties to run incentivized relay nodes. These nodes will accept fees from the original chain where users submitted the transaction, rather than those fees going directly to the Ethereum miner who processed the transaction or taken by Solana as rent. 

We'll also be able to expect a stable connection to Terra via Wormhole. Users will be able to wrap their LUNA and bring it through the bridge to Solana and Ethereum. 

Wormhole will facilitate more of these cross-chain collaborations. More users can interact across networks without expanding their portfolio or purchasing more additional tokens; the more that networks will be used. With an improved UI/UX design, bridges like this will continue the growth of Web 3. 

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