The difficulties migrating digital belongings resembling bonds or NFTs with residual funds between completely different L1 or L2 chains
Authors: Andreas Freund, L2 WG Co-Chair, on behalf of the EEA Neighborhood Initiatives L2 Working Group
Everyone knows that Web3 will rule the world, regardless of shoppers hooked on the web2 means of immediate gratification furiously hitting (again) buttons and yelling at screens when their Ethereum transactions aren’t full after 2 seconds. L2s will give these shoppers their Velocity for the Web3 world of tomorrow, at this time.
L2s can provide Fortnite nerds their favourite, uncommon in-game skins or weapons as NFTs that may be traded in or exterior of the sport, producing eye-watering earnings. They will additionally present full privateness in asset buying and selling with esoteric zk-zk-rollups. Full privateness is a dream for all conventional finance asset managers and is frowned upon by world tax authorities.
So what’s to not love or hate or love and hate about L2s?
As our asset managers are excitedly creating L2 buying and selling accounts, they’re rapidly confronted with the comparatively meager collection of monetary belongings that may be traded on L2s. Wish to transfer any of your debt devices from Ethereum’s Maker, Aaave, Compound, or Centrifuge? Nope! Annuities? Nope! Dividend-paying shares? Nope! How about transferring them to different Blockchains or transferring them from different Blockchains? Nope!
Nicely, you are able to do easy NFTs or tokens, or you possibly can create and commerce your debt devices immediately on an L2, however they are going to be caught there. At that time, our asset supervisor sighs, closes their laptop computer, and walks away. Since our asset supervisor represents about 40 Trillions USD of trades per quarter globally, and since extra complicated belongings comprise 95%+ of these trades, L2s could have a tough time taking over conventional finance, and thus proceed to develop exponentially for a protracted time period, until they’ll tackle the market of digital belongings paying residuals.
The query is then why are these kinds of complicated digital belongings accessible on Ethereum markets resembling Aave however can’t be moved to L2s?
Let’s take a step again and take a look at the present scenario. At the moment, the tactic of bridging digital belongings resembling ERC20 tokens or NFTs between networks – for instance, Ethereum <> L2, Ethereum <> Zksync, Ethereum <> Polygon – immobilizes the belongings on the origin community after which instantiates them on the goal community.
This strategy works nicely if the digital asset has no related enterprise guidelines that infer rights or obligations to asset house owners resembling secure cash or easy NFTs. Examples of essential digital belongings that infer rights to the digital asset proprietor are residual funds/asset grants resembling dividend-paying equities, bonds, annuities, asset-backed securities, digital belongings with royalties, and many others.
Sadly, such digital belongings at present can’t be transferred between networks as a result of a switch would break the connection between the asset and the rights or obligations related to it.
Given the significance of digital belongings with residuals in conventional finance, the rising proliferation of DeFi belongings that mimic conventional belongings resembling bonds or asset-backed securities, and an increasing number of worth locked in bridges and L2s, there’s a important hazard that L2s will hit a progress plateau as a result of they can not provide what many of the world needs to commerce.
So, what might be attainable resolution approaches to this conundrum?
The reply is, not many … no less than but!
Determine 1: A easy bond on an L1 blockchain
Utilizing the straightforward instance of a Bond on Ethereum paying on a schedule in DAI (see Determine 1 above), we define among the challenges (in Determine 2 beneath):
- Since Alice, the payer of the scheduled bond funds, is mostly unaware that Bob, the payee, moved a bond from Ethereum (L1) to L2, Alice would ship funds to the L1 Bond good contract with Bob’s Ethereum tackle. Since Bob is not the proprietor of the bond, however reasonably the bridge contract is, the cost would fail.
- If the bond contract have been nonetheless conscious that Bob was the payee, then it might nonetheless settle for a bond cost, however the cost could be owned by the bridge contract.
- Due to this fact, when the bond is locked within the bridge, the anticipated DAI bond funds should be instantiated on the L2 aspect within the Bond contract, now with Bob’s L2 tackle being the proprietor of each the Bond token and the wrapped DAI
- Because of this when a cost is obtained into the Ethereum bond contract, the bridge community should be notified concerning the cost by an occasion and mint the cost quantity as wrapped DAI on the DAI bridge contract on the L2 aspect, for Bob. That’s problematic as a result of there is no such thing as a corresponding DAI within the bridge on the Ethereum aspect. In spite of everything, it’s related to the Ethereum (L1) bond contract. Because of this Bob’s WDAI on L2 could be nugatory. Due to this fact, the cost quantity in DAI can solely be minted as an Ethereum IOU within the L2 Bond contract, because the DAI can’t be taken out of the L2 bridge contract. Ergo, the DAI funds the bondholder receives are ineffective on the L2 aspect. That’s naturally not fascinating.
- If the bond is traded to Claire on L2, Claire is now eligible to obtain bond funds and Bob not is. That implies that after Claire bought the Bond, the bridge community should notify the L1 bond contract of the brand new proprietor for Claire’s cost to be obtained on the Ethereum aspect. That additionally implies that Alice must know that she must ship her bond funds listed to Claire and never Bob. And as soon as Claire receives a cost, the bridge community must create the identical Ethereum DAI IOU on the L2 aspect. And so forth for each possession change.
These open questions are for the straightforward case of a bond. Royalties for instance, the place the funds are principally unbiased of token possession and usually a couple of occasion receives a portion of the cost, are much more complicated as a result of not all funds should be bridged. Nevertheless, the (web current) worth of the digital asset relies on general cost flows.
Usually talking, it’s unclear the best way to port complicated digital belongings between networks when the worth of the asset is dependent upon funds on the origin community however the asset is traded on the goal community.
A promising first try has been made to handle this complicated problem with the GPACT protocol and Crosschain Protocol Stack, which is at present being developed throughout the EEA Crosschain Interoperability Working Group.
The newly shaped EEA Neighborhood Initiatives L2 Working Group, with participation from the EEA, Matter Labs, Polygon, Offchain Labs, Accenture, VMWare, ConsenSys, Perun, Connext, Present, and the Ethereum Basis, has additionally taken up the problem and printed an Eth Magicians and Eth Analysis put up on the topic, calling on the Ethereum neighborhood to solicit feedback and sort out this problem, and is collaborating with the EEA Crosschain Interoperability Working Group to see if the GPACT protocol will be efficiently utilized in a PoC to switch complicated digital belongings between L2 networks.
We’re inviting all events to hitch us and tackle this essential problem for your complete public, enterprise, and Blockchain ecosystem collectively!
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