DeFi enabled Ethereum bridge for Cosmos
DeFi investment is just another set of rules and automation for the bridge. Not a giant leap in technology, but instead, of perspective.
In this post we outline a vision of the Ethereum ↔ Cosmos bridge (Peggy) that allows token holders to make arbitrary DeFi investments with liquid bridge capital.
Like other transaction processing platforms, similar to VISA or Stripe, it’s fiscally advantageous for the token holders of a Cosmos zone operating Peggy to leverage the liquidity locked in the bridge to collect interest. With the rise of decentralized finance (DeFi) and, in particular, the Dai Savings Rate (DSR) this sort of high liquidity, low risk investment required is now available to everyone in the Ethereum ecosystem. Through the Peggy bridge, this functionality could soon be used by anyone with a Cosmos zone as well.
Peggy, the Cosmos Ethereum bridge, is a way to bridge arbitrary Ethereum ERC20 assets, like Dai, to Cosmos zones, or to bridge Cosmos assets like ATOM to Ethereum.
Peggy is a bridge made up of an Ethereum contract, which stores the full validator state and a Cosmos module run by the validators to produce updates and send transactions to and from Ethereum.
In the most basic sense, the Peggy Ethereum contract is simply a multi-sig wallet controlled by the current Cosmos validator set plus some automation. There’s nothing stopping the validators of the Cosmos hub from getting together right now, deploying a boring old multisig, and simply running a bridge by hand. Of course, voting on each deposit and withdraw manually, while possible in theory, is impossible in practice. It is the automation provided by the Cosmos module which makes a bridge a viable tool.
In that sense, DeFi investment is just another set of rules and automation for the bridge. Not a giant leap in technology, but instead, of perspective.
We propose that the Peggy Cosmos module provide its own machine-readable and automatically actionable governance proposal format for the investment of bridge capital into arbitrary DeFi constructs. For example, a governance proposal could be submitted to invest half of the bridge funds into the Dai savings rate, with a liquidation preference that $1000 at time be removed from the DSR to fund bridge withdraws if required. Once that proposal was voted in, the Peggy module would accept the new ruleset and start to execute it - balancing the investment automatically, by either withdrawing or adding funds to the DSR.
This can be further extended by adding Uniswap support. Allowing the token holders to apply their investment goals across a variety of assets that would otherwise be locked in the Peggy Ethereum contract.
Finally we don’t even have to limit ourselves to a pre-defined series of investments, the governance proposal itself could define the required contract calls to deposit, withdraw, and monitor the balance of a proposed investment.
While it will remain possible to construct an Ethereum contract that the Peggy Cosmos module couldn’t interact with without a module upgrade, the vast majority of DeFi contracts now and in the future would be only a governance proposal and a vote away.
Althea’s Trustless Peggy Optimizations
We envision this Defi value capture in the context of our improved, trustless Peggy design.
The proposed security model of the Peggy Ethereum bridge uses a mix of semi-trusted parties and game theory to overcome key difficulties with the Ethereum execution environment. The main difficulty being updating the validator set on every voting power change and performing signature verification across all validators for each transaction is inordinately expensive in terms of Ethereum gas.
Althea has developed a series of optimizations that allows for the cost of validator setup updates to be reduced to 12c every 24 hours on average and for the cost of transactions to be reduced to simply the cost of the underlying ERC-20 send given a sufficiently active bridge.
These Ethereum contract optimizations allow for a simpler bridge design and a focus on adding extra features like the DeFi support. Working together with Interchain and Cosmos stakeholders, we hope to work over the coming year on implementation. Public tests nets are estimated in late third quarter 2020.
Althea builds tools which allow routers to pay each other for bandwidth using micro-payments.
We specialize in producing reliable, highly optimized code that operates in harsh environments, so we are well suited to building this functionality into the bridge. Justin Kilpatrick co-founder and CTO worked as a performance engineer on Red Hat’s performance and scale team for two years before leaving to found Althea. Jehan Tremback co-founder and advisor has been closely involved with Ethereum and the programmable blockchain space since its inception. He scoured the earth for Solidity optimization tricks to create Guac. (Guac is a highly optimized payment channels implementation for Althea. It is the most optimized non-hub payment channel library available.)