How Liquidity Mirroring will drive adoption in the DeFi space

DeFi continues to advance the frontiers of digital finance beyond what is usually obtainable within the mainstream finance sector. Newer approaches at solving the myriad problems plaguing the DeFi sector surface now and then, with players in the industry adopting any of the systems proven to be a better alternative. One of the key drivers of the massive growth in DeFi that we see today is the neck-breaking speeds at which DEXs — decentralized exchanges have continued to iterate after Uniswap led the charge with the DEX revolution.

The critical approach DeFi projects continue to use as a bootstrapping technique for their project is liquidity mining. By liquidity mining, we mean that anyone, whether an individual or an institutional investor, stakes their assets (usually stablecoins and other native assets) into a pool created by that project on a DEX to help prop up liquidity. For their efforts, they earn network fees and that particular DeFi projects native as an added incentive. The rate of mining these tokens usually depends on the APY offered.

But the staking of assets to farm yields doesn’t come without risks. Agreed that DeFi’s non-custodial and mostly on-chain activities remove counterpart risks present in centralized exchanges. However, the fact that yield farmers are always on the constant search for higher yields means moving assets from one protocol to another. And because liquidity can be unevenly distributed among DEXs and other decentralized protocols, slippage is a huge risk that depletes the gain of most DeFi users. To solve this, several approaches are constantly being explored. Uniswap’s third iteration implemented capital efficiency to help reduce the drag slippage causes on LPs funds. Layer 2 solutions conduct most of their activities off-chain while using the base layer chain as the settlement layer.

Still, there is friction for LPs seeking to bridge access across chains. While Polygon offers incredible speed and cheaper fees, it is not entirely as rich in token options as we can see on Ethereum with a slew of ERC20 tokens built atop the network. Like Avalanche, BSC, Solana, etc., contender chains are constantly looking to ape away some decent amount of Ethereum’s market share. With the DeFi industry’s current trajectory, the future suggests no single chain will win the entire market. While Ethereum remains resilient at being the top choice for innovators looking to try out their hands in DeFi products/services, these contender chains I mentioned earlier equally have their success stories.

POS bridges afford LPs the leverage of bridging assets across chains. But DeFi degens need their transactions faster than the currently obtainable speeds from the various bridges available. For instance, dapp users trying to move their assets across different chains need to wait for at least 4 hours for their deposits to reflect if they are transiting from a regular POS bridge. Plasma bridge requires 7 days, while Polygon takes at least 8 minutes. Withdrawals time can be longer because network validators need to conduct adequate checks to ensure no fraud is perpetuated. This delay has its tradeoffs — poor user experience for DeFi users.

An innovative approach to flip asset bridging right on its head will be through relay chains where LPs can stake their assets on a particular chain and unlock the same asset value on a different chain almost instantly. This is called Liquidity Mirroring, a new concept for instant cross-chain asset bridging. Pontoon Finance is currently leading the charge in this area, driving more adoption of DeFi services in the industry.

In liquidity mirroring as put forward by Pontoon Finance, a decentralized relayer network facilitates gas-less cross-chain transfers where token swaps across multiple chains seamlessly without delay. LPs who provide liquidity for the various pools in the different chains that Pontoon’s relayer network connects to are incentivized through network fees and further rewarded in Pontoon’s native TOON token. Asset bridging on Pontoon happens in one click for end-users making sure user experience is not compromised in achieving faster asset bridging.

Pontoon currently supports ETH, BSC, HECO Chain, xDAI, POLYGON, OPTIMISM and hopes to expand to other thriving blockchain networks. This could be the answer to more adoption of DeFi products and services if decentralization, cheaper fees and speed are not to be compromised.

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Cross-Chain liquidity mirror protocol