Cross-Chain Yield Farming, DeFi, and DEX Usage Growth

The goal of the entire cryptocurrency and blockchain movement has been achieving decentralization. Cryptocurrency provided a decentralized way to move value as an alternative to fiat that gave users more control. Decentralized exchanges (DEXs) provided a decentralized option for swapping cryptocurrencies in place of Centralized Exchanges (CEXs) that charged high fees and maintained control of users private keys. DeFi emerged as a way to have the benefits of traditional finance — saving, investing and lending- without the reliance on government and traditional financial institutions. DeFi participants have become a major market in cryptocurrency, and are the main protagonists in our march toward full decentralization of value.

DeFi has been the next phase answer to the communities quest to attain pure decentralization, and DeFi has gone hand-in-hand with the development of the DEX ecosystem. One example of this connection is that DeFi has spawned automated market makers (AMMs) through liquidity pools to solve the centralization of order books. Liquidity pools took over from order books providing an incentive for token holders to supply coins by letting them generate fees from traders, allowing DEX platforms. Additionally, most DeFi participants in yield farming and liquidity providing tend to use DEX platforms, as many yield farming and LP pools require users to deposit the native token of the DEX along with another token in 1:1 pools. In the past, you would generally need to get the native token from the exchange platform, but these tokens are now being listed on centralized exchanges. The growth and adoption of DeFi and DEX is inter-reliant.

DEX platforms still suffer from liquidity issues compared to centralized exchanges even with the advent of liquidity pools, making adoption move slowly. DEX aggregators have emerged to pool liquidity together under one platform as a solution, but these aggregators cannot function cross-chain with most being ERC-20 based and only able to aggregate pools on Ethereum leading to lower liquidity than CEXs. This isn’t optimal; with DeFi applications beginning to branch out onto other chains with lower gas fees such as BSC or HECO, many traders are resorting back to using centralized exchanges to get the tokens they need quickly, at the lowest price and in the right volume, reversing some gains. On the flip side, as more and more DeFi applications jump to new blockchains, it is becoming harder for users to move their assets quickly and efficiently between networks — growth of DeFi on multiple networks is contingent upon the ease of movement to and from them.

So, this gives us two important questions:

• How do we continue the growth of DEX usage in the crytocurrency market as more and more DeFi traders begin trading on other blockchains?
• How can we make it easier for DeFi to thrive cross-chain?

Cross-Chain DEX Aggregators

Cross-chain DEX aggregators such as Polkaswitch or OpenOcean leverage multi-network protocols to pool liquidity from many blockchains into one place, providing better liquidity and asset variety for traders.

These aggregators use advanced algorithms to find the best ways to fulfill trades across different blockchains. They execute orders at the best price across different protocols, allowing users to instantly swap between tokens on different networks, including ones that are lesser used.

The benefit of cross-chain DEX aggregators to users is that they can provide low fees while allowing holders of their governance token to have some control over the platform and other rewards. They also provide maximum liquidity comparable to CEX exchanges and allow orders to be fulfilled quickly.

DEX aggregators are mostly going to assist liquidity providers, lenders and yield farmers with their needs. They’ll allow them to get the tokens they need on the network they need. Is there a way to provide the benefits of these DEX agreggators to this market in a more user-friendly way?

Potentially, through in-app cross-chain protocols.

Cross-Chain Yield Farming Aggregators

Another way to address the needs of DeFi participants is to move the burden of cross-chain transactions from the exchange-level to the application-level. A great example of this is Bagels Finance where users will be able to participate in pools on BSC, HECO and Ethereum.

On Bagels, users will be able to quickly swap assets through a cross-chain bridge built into the protocol called Dokodoa. A user wanting to participate in an ETH/DODO pool on Ethereum, who only has DODO on BSC, can execute a transaction that maps their assets to Ethereum and provides a matched token on the Ethereum network (dETH) that is used for the pool. This allows the user on BSC to pay a lower gas fee to farm the liquidity pools on Ethereum. The gas fee generated by smart contract interaction on Ethereum is paid by executors on Ethereum, similar to platforms like KP3R.‌

This puts the burden on Bagels to find the liquidity for the match through its partners, not the user through a DEX. The user is able to combine the actions of switching user settings and depositing assets into one step, instead of the two-step process of swapping on a DEX aggregator or centralized exchange and then moving funds into the right pool in the right amount on their chosen DeFi application. Most importantly, the user will save a lot on gas fees by not having to interact directly with the Ethereum smart contract.

Many yield farming protocols will be taking this route to make the asset swapping process easier and more user friendly for their farmers to do this process in one place, while allowing the protocol token holders to benefit from the fees from the swaps on their cross-chain bridges. With Bagels, yield farmers can find the best pools on multiple chains, hunt for the best rates, and even swap tokens in one place, making it a one-stop shop.

On the other side, cross-chain yield farming protocols like Bagels will need to partner with DEXs and aggregators to share TVL so they can meet their liquidity needs. This will allow individual DEXs to also gain better liquidity without having to grow natively, spurring their growth and allowing them to build off of already-made cross-chain technology, so DEXs can launch onto multiple chains.

Overall cross-chain yield farming aggregators may offer the most value to help DeFi traders avoid using centralized exchanges and continue to push decentralized market forward.