The case for cross-chain
Blockchains integrated into Axelar Network, a relay chain offering cross-chain General Message Passing
As presented in the figure 5, volume on the Ethereum blockchain surpasses volume on any other chain by far. This goes beyond the fact that the Ethereum blockchain has the biggest total value locked and biggest amount of ”whales”. Ethereum NFT communities have the most engagement of all NFT communities. They represent most of the web3 engagement on social plateforms like Twitter and have the majority web3 artists. This makes it attractive to games and other ecosystems to integrate these NFTs.
Ethereum is a blockchain optimizing for security and decentralization. Ethereum has been pushing for Layer2s as a means to scale the Ethereum blockchain. Many applications like games and metaverse are blocksize intensive and demand higher throughput than what the Ethereum blockchain can pro- vide. This makes it so these applications avoid building on Ethereum, and go towards more scalable blockchains.
One of the main usecases of NFT renting is being able to use assets in different ecosystems adapting to the needs of the users. This makes it so a cross-chain renting solution is very valuable for the usecase of Jaypigs. There are multiple ways to execute this from a technical standpoint. While security and contagion considerations are to be taken into account, the advantage of developing a cross-chain solution for the renting usecase makes it so the benefits outweigh the risks.
Having established the case for cross-chain for the rewards mechanism and the renting solution, it is important to understand the benefits for the borrowing solution as well. The clearest benefit is the access to liquidity on different chains. This makes it so users who have liquidity on one chain can use it provide loans against NFTs from a different chain. Aggregating liquidity is the main reason why cross-chain DeFi makes sense. By the same token, this is why NFT backed loans are important.
In addition to aggregating liquidity, the risk concerns for NFT-backed loans are greater when it comes to less established collections. For users having liquidity on certain chains, it can be difficult to come by a strong NFT with a solid risk profile attractive enough to lend money. Allowing lending through cross-chain applications solves this issues, as it allows liquidity on any chain to access so-called ”blue-chip” NFTs.
While NFTs have developed to be present on different blockchains and ecosystems, the volume of NFT transactions is a lot more important on a few chains compared to others. Users have a tendency to go into the ecosystem where the most liquid assets exist. As it is shown in the figure below, not only did NFT volume go down substantially in dollar terms since January, but the main chain sustaining consistent volume has been Ethereum.
Volume of NFT trading by Chain. Source: TheBlock
When building a rewards system in a multi-chain NFT platform based on volume, there should be enough consideration for the ecosystems where volume is low, so to keep incentivizing users on these chains. Hence, creating a cross-chain rewards system makes complete sense. This makes it so the users have a significantly bigger pool to get rewards from. Allowing users to share volume from ethereum on ”cheaper” chains creates the incentive for them to participate on different chains. It also creates bigger demand for cross-chain NFTs.
Furthermore, in a world where multiple blockchains are being used for multiple usecases, it makes sense that users should be able to use whatever tokens they have on one chain to another chain in a fast and a reliable manner. While cross-chain applications represent systemic risks for each blockchain, there are many benefits that can come from accessing cross-chain liquidity, and allowing users to use assets from different chains instantly.