DeFi continues to evolve and it is no longer news that Orderly’s mission aims to solve one of the prevalent issues with DeFi — the siloed nature of liquidity across various chains. Blockchain Interoperability sits at the heart of the solution to fragmented liquidity challenges, ensuring asset compatibility amongst chains. While innovation in this regard is still ongoing, current solutions to unifying liquidity in DeFi largely revolve around cross-chain bridges and wrapped assets.
With the inefficiencies of these current solutions being outed in recent times, often related to significant asset losses, it is evident that novel approaches to tackling liquidity challenges in DeFi are required.
In this piece, we spotlight risks associated with the current DeFi landscape and Orderly Network’s innovative approach to this prevalent issue.
Decentralized finance (DeFi) is a fast-growing sector of the cryptocurrency industry that aims to provide financial services without intermediaries. However, DeFi also faces many security challenges, especially when it comes to interoperability between different blockchain networks. One of the main methods of achieving interoperability is using cross-chain bridges and wrapped assets.
Cross-chain bridges are protocols that allow users to deposit their tokens on one chain and receive a corresponding token on another chain, such as wrapped Bitcoin (WBTC) on Ethereum. These bridges can be either centralized (trusted) or decentralized (trustless), depending on whether they use a custodian or a smart contract to facilitate the transfer.
One of the main security risks of using cross-chain bridges is the possibility of hacking attacks on the custodian or the smart contract that holds the tokens. For example, in 2022, several cross-chain bridges were exploited by hackers who stole millions of dollars worth of tokens, such as the Wormhole bridge, the Ronin bridge, and the Nomad bridge. These attacks resulted in the loss of deposits and the devaluation of the debt tokens on the other chain. Another security risk of using cross-chain bridges is the lack of standardization and expertise in building secure models for cross-chain applications. Different bridges may have different designs, features, and vulnerabilities that users need to be aware of before using them.
Additionally, using wrapped assets as collateral or liquidity in DeFi protocols exposes users to further risks, such as market manipulation, illiquidity, volatility, and contagion. Wrapped assets are not fully backed by the original assets, and they rely on the trustworthiness and solvency of the issuer or the bridge. If the issuer or the bridge fails or becomes compromised, the wrapped assets may lose their value or functionality. Furthermore, wrapped assets may be subject to price fluctuations, liquidity issues, and systemic shocks that affect the underlying assets or the DeFi ecosystem as a whole.
Recently launched on mainnet, Orderly Omnichain represents our expansion to the broader DeFi ecosystem, starting with the birth home of DeFi — the EVM ecosystem. We’ve built an order book that is accessible via all major EVM chains, thus delivering the numerous benefits of Orderly’s innovative infrastructure to EVM builders and traders.
But how then does our infrastructure protect cross-chain asset loss? By eradicating the need for bridges or wrapped assets.
Orderly’s innovative solution features the pre-deployment of asset vaults on each chain we are integrated with. These vaults all interface with the Orderly app chain (also referred to as the Orderly Settlement layer). All trades are settled on-chain via the Orderly App Chain built on OP Stack.
Orderly omnichain is designed such that assets do not need to move across chains to execute trades. Instead, only cross-chain messages relaying vital information (such as transaction data, user data balances, trading data, etc.) are sent — all powered by LayerZero.
This means that traders can engage in transactions with counterparts on other different chains without moving assets from their current chain — all while maintaining self-custody and enjoying a familiar order book trading interface.
Our omnichain drive has kicked off with the first vault successfully deployed on Arbitrum. This means that EVM developers and traders can now access Orderly’s innovative order book fitted with deep liquidity on the Arbitrum via any trading platform built on Orderly Omnichain.
The coming days, weeks, and months will see the expansion of Orderly omnichain to the broader EVM ecosystem including Optimism, AVAX, Linea, Scroll, and more. Vaults play a vital role in the “asset layer” of Orderly omnichain and they will be deployed on each of these networks as we continue to push the boundaries of DeFi innovation.