Publish Date

October 17, 2024

Cross-chain Liquidity Aggregation: Definition, Working, Types, Pros and Cons

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Ever wonder why some crypto trades go smoothly while others feel stuck?

Well, it all comes down to liquidity (i.e., how easy it is to buy or sell an asset without changing its price).

And in this article, we’ll go one step further by exploring what cross-chain liquidity aggregation is, together with its features, types, and challenges, so you can best understand its implications when DeFi trading.

What is cross-chain liquidity aggregation?

Cross-chain liquidity aggregation pulls assets from different blockchains that don’t naturally communicate with one another by using bridges (like Wormhole or Binance Bridge) and smart contracts (such as Automated Market Makers like Uniswap), bringing them into one place to give you better prices, more liquidity, and faster trades.

Why is cross-chain liquidity aggregation important?

Imagine you’re trying to trade a token on Ethereum, but the price is too high because there’s not enough liquidity (not enough tokens available to trade) on the Ethereum blockchain.

You know that Binance Smart Chain has more liquidity for that same token, but now you have to manually move your assets over to Binance Smart Chain, deal with gas fees, and hope the price hasn’t changed by the time you get there.

Instead of forcing you to hunt for liquidity on different blockchains and go through the hassle of moving assets around, cross-chain liquidity aggregation does all that for you.

Cross-chain liquidity aggregation is a function of market depth. Source: X

How does cross-chain liquidity aggregation work? (with examples)

Cross-chain liquidity aggregation works through:

1. Cross-chain bridges: Moving assets between blockchains

Let’s say you have Ethereum (ETH) on the Ethereum blockchain, but you want to trade it for Binance Coin (BNB) on Binance Smart Chain (BSC).

Ethereum and Binance Smart Chain are two separate ecosystems, and you can't directly trade between them because they don’t naturally interact.

This is where cross-chain bridges come in.

Cross-chain bridges are crucial for liquidity aggregation to be done right. Source: X

The cross-chain bridge is like a connector between the two blockchains. First, you send your ETH to the bridge. The bridge locks or holds your ETH on the Ethereum side and then creates a wrapped version of ETH on Binance Smart Chain. This wrapped ETH can now be used for trading on BSC, giving you access to the liquidity available there.

2. Oracles: Getting real-time price and liquidity data

Once your wrapped ETH is on Binance Smart Chain, you want to make sure you get the best possible deal when trading for BNB.

Prices for tokens can vary across blockchains, and the amount of liquidity available (how much of a token is available to trade) can also differ.

This is where oracles come in.

Oracles = the backbone of cross-chain liquidity aggregation. Source: X

Oracles are like messengers that bring real-time data from across blockchains by fetching and verifying off-chain information through a network of nodes that aggregate data from multiple sources. They check prices and liquidity levels across blockchains like Ethereum, Binance Smart Chain, and Solana, ensuring you trade at the best possible price with enough liquidity to avoid slippage (unexpected price changes)

3. Automated Market Makers (AMMs): Managing liquidity pools and executing trades

Now that you know Binance Smart Chain offers the best price, the next step is to actually execute your trade.

Automated Market Makers (AMMs) use smart contracts (such as Constant Product Market Maker on Uniswap or Constant Sum Market Maker) to automatically manage liquidity pools—pools of tokens that people can trade against.

AMMs not taking off on DEXs? Read more here. Source: X

AMMs ensure there’s always enough liquidity for your trade by adjusting prices based on supply and demand.

The AMM on Binance Smart Chain takes your wrapped ETH and automatically trades it for BNB using a liquidity pool. AMMs work without the need for a traditional buyer and seller, instead adjusting prices based on how much liquidity is in the pool. In this case, the AMM is connected to liquidity pools on both Ethereum and Binance Smart Chain, allowing it to efficiently handle trades across both networks.

4. Liquidity routing: Finding the best path for your trade across blockchains

Now, imagine the liquidity pool on Binance Smart Chain has high fees, or there’s not enough liquidity to cover your full trade. Instead of sticking with a less efficient trade, liquidity routing comes into play to find the best route for your trade across multiple blockchains.

MC Finance has mastered liquidity routing. Source: X

When liquidity routing occurs, the aggregator uses techniques like multi-path routing to split trades across multiple liquidity pools on different blockchains.

💡 If a pool on Ethereum lacks sufficient liquidity, the trade can be split and routed through other chains.

So if Binance Smart Chain’s liquidity pool is congested or has high fees, the aggregator might route your trade through Solana, where fees are lower, and liquidity is better.

Different types of cross-chain liquidity aggregators (with pros and cons)

Now there are various types of cross-chain liquidity aggregators, each with their own set of advantages and disadvantages:

1. Protocol-based liquidity aggregators

2. DEX aggregators

3. Cross-chain AMM aggregators

4. Centralized cross-chain aggregators

5. Hybrid aggregators

1. Protocol-based liquidity aggregators

Protocol-based liquidity aggregators are fully decentralized and rely on smart contracts, such as those using a Continuous Liquidity Model. This model automatically adjusts the price of assets based on the liquidity within the pool,

Hence, these protocols (e.g., ThorChain) allow for native cross-chain swaps without needing wrapped assets.

They also use cross-chain bridges (such as RenBridge or ThorChain's Bifröst) and decentralized oracles (like Chainlink or Band Protocol) to facilitate the movement of assets and data between blockchains.

Chainlink’s push-model has limitations. Source: X

Pros:

✔️ Fully decentralized, no need for third-party trust

✔️ Allows native asset swaps without wrapping

✔️ Greater transparency and censorship resistance

Cons:

✖️ Can be slower and more expensive due to high gas fees and complex processes

✖️ Limited scalability as more chains are integrated

✖️ Requires more technical knowledge to use

2. DEX aggregators

DEX aggregators, like 1inch, pull liquidity from multiple decentralized exchanges across blockchains by scanning their liquidity pools to find the best price for a trade and route it through the most optimal liquidity source.

Such DEX aggregators use smart contracts, like 1inch’s Pathfinder and Matcha’s RFQ engine, that split trades across various liquidity pools, analyzes real-time market conditions, and routes the trade through the most optimal path across supported DEXs like Uniswap, SushiSwap, and Balancer.

DEX aggregators or “shady front running” in the guise of cross-chain liquidity aggregation? Source: X

Pros:

✔️ Best prices by comparing multiple DEXs

✔️ Non-custodial, so users retain control of their assets

✔️ Reduces slippage by accessing multiple liquidity pools

Cons:

✖️ Can incur multiple transaction fees, increasing overall costs

✖️ Limited to available DEX liquidity

✖️ Slower transaction execution compared to centralized platforms

3. Cross-chain AMM aggregators

Cross-chain AMM aggregators manage liquidity across multiple blockchains using Automated Market Makers (AMMs).

They pull liquidity from AMM pools (e.g., on Uniswap or SushiSwap) across different chains and combine it to offer better liquidity for trades but rely on cross-chain bridges (e.g., AnySwap, Synapse) and smart contracts (e.g., Ren Protocol's lock-and-mint contracts) to execute trades between chains.

The problem of toxic flows on AMM liquidity pools. Source: X

Pros:

✔️ Always available liquidity due to the AMM model

✔️ Reduced slippage by pooling liquidity across multiple chains

✔️ Operates without order books, making trades automatic and continuous

Cons:

✖️ High gas fees when interacting with multiple AMMs and blockchains

✖️ Prone to impermanent loss for liquidity providers

✖️ Complex to manage for users who need to interact across multiple AMMs

4. Centralized cross-chain aggregators

Centralized cross-chain aggregators, like Binance Bridge, rely on a centralized platform to manage liquidity and execute trades across blockchains.

These aggregators use centralized servers (like AWS - Amazon Web Services, which provides cloud infrastructure to manage requests and process trades quickly) and internal systems (like order-routing algorithms) to facilitate fast, easy cross-chain liquidity movement.

Centralized cross-chain aggregation = a messy loss of customers? Source: X

Pros:

✔️ Fast and easy execution of trades

✔️ Lower fees and faster processing than decentralized solutions

✔️ User-friendly, requiring little technical knowledge

Cons:

✖️ Centralized, so users must trust the platform with their assets

✖️ Prone to censorship or restrictions based on the platform's policies

✖️ Lack of transparency compared to decentralized options

5. Hybrid aggregators

Hybrid aggregators, like RocketX, combine decentralized and centralized elements to offer both the transparency of decentralized systems and the efficiency of centralized services.

These platforms may use decentralized smart contracts (like Anyswap's Fusion DCRM, which securely locks assets on one chain and mints them on another, allowing cross-chain transfers without intermediaries) to manage liquidity while relying on centralized infrastructure (like cloud servers such as Google Cloud) to process and monitor blockchain activity.

The cross-chain liquidity aggregation (hybrid route) is not all sunshine and rainbows. Source: X

Pros:

✔️ Combines the best of both worlds: speed and transparency

✔️ Offers faster execution than fully decentralized platforms

✔️ Lower gas fees due to centralized optimization

✔️ More scalable, handling larger transaction volumes efficiently

Cons:

✖️ Requires trust in centralized components, which can be less transparent

✖️ Potential points of failure due to centralized infrastructure

✖️ Not as censorship-resistant as fully decentralized systems

Conclusion: The future is multi-chain

Whether through full decentralization, hybrid models, or centralized solutions, cross-chain liquidity aggregators will be key tools for the next generation of traders and liquidity providers. The future is in seamless multi-chain systems, where liquidity moves freely across blockchains without barriers.

MC² Finance is leading this shift by offering an easy-to-use multi-chain platform that connects liquidity across chains, gives you the tools to analyze, discuss, and invest in the best liquidity in real-time.