As blockchain adoption increases and new layer 1 and 2 networks are developed, interoperability will continue to be an important area for further development. The proliferation of blockchains has provided developers with many platforms to run their smart contracts on, and given them the luxury of choosing a network based on their application’s requirements for throughput, security, and cost.
This has provided lots of flexibility, but it has also resulted in severe fragmentation of liquidity as applications continue to be built on different chains. Projects and investors are forced to silo their liquidity on specific chains, which reduces composability and capital efficiency. The current infrastructure for sending digital assets between networks are ripe with issues.
Currently users must use a decentralized bridge or a centralized exchange to interact between chains, each of which have their own drawbacks. When using a centralized exchange, the user must trust the exchange that is tracking deposits and honoring withdrawals. This trust relationship is contrary to the fundamental trustlessness of blockchain consensus and lacks the security of an on-chain automated system.
Decentralized bridges have been a vulnerability for user funds, with over $1.4 Billion being stolen from bridges in 2022 alone. While the architecture allows for trustless transactions between networks, bridges can be complicated and are vulnerable to exploits. Users are reducing one risk in favor of another.
As recent bridge hacks and centralized crypto platform insolvencies have demonstrated, there is an imminent need for a trustless platform to transact between blockchains while protecting user funds. For such a platform to be viable it must be capital efficient, fast, and most of all, secure.
This is where Magpie flies into the market. Magpie is a decentralized, liquidity aggregation protocol for cross-chain swap built on top of the Wormhole bridge infrastructure. We recently invested in Magpies seed round alongside other notable investors and are thrilled to support the team as they work to provide an unrivaled user experience for cross chain swaps.
“Magpie Protocol is a decentralized liquidity aggregation protocol for cross-chain swaps aiming to provide the best deal on any asset across top blockchains without the need to directly bridge assets.”
Magpie protocol allows users to swap and transact between different blockchains without locking their funds into a bridge contract or centralized exchange. Instead of a traditional asset bridge where funds are transferred, Magpie only uses the generic messaging layer on bridges to send a cross-chain message that initiates a swap on the destination chain. User assets are never deposited to the bridge contract, therefore they are not susceptible to the exploits referred to above.
Rather than requiring users to lock or burn tokens and then mint them on the destination chain like a traditional bridge, Magpie uses stablecoin liquidity pools and their liquidity aggregation protocol to initiate swaps for the desired token. Funds are deposited on one network and a message is relayed to the destination chain, initiating a withdrawal on the other. This results in users receiving their tokens on the destination chain very quickly, for much less gas, not being limited to swapping stablecoins or the chain's native gas token. The entire process is facilitated through a single user interface which requires interacting with no other dApps.
In addition to providing a safe and quick way for users to transact between chains, another core element of the Magpie protocol is a liquidity aggregator that is designed to provide users with the best price for their trades. Orders executed on individual order books or liquidity pools are issued at the local price,however a lack of central price aggregation can lead to price variation on different venues. This can be harmful to traders, especially on high volume orders.
A liquidity aggregator is a piece of software that allows participants to simultaneously obtain streamed prices from several liquidity providers/pools. Buy and Sell orders are collected from various sources and run through a simulation to generate a price quote that represents the approximate mean. Aggregation provides traders with an opportunity to buy an asset at prices close to the market average.
The initial tests performed by Magpie have been promising, with the protocol providing a better price quote than its competitors in 90/90 tests, using orders of 1,000, 10,000, and 50,000 USD. On the largest orders of 50,000, Magpie’s liquidity aggregator was able to generate users with a 0.2 and 0.8% better price than 1inch and 0x respectively.
While Magpie is a complicated protocol with many intricate parts under the hood, their developers focused on creating a seamless user experience. The team told us that their main focus for users is the ease of use, transaction cost (quoted price + fees), and execution speed. From my initial test of the product they seem to be meeting their targets, as the cross chain swap had the best UX that I have seen to date. The Magpie team describes it as:
“The advantage of Magpie comes in its user experience, security, ease-of-use, and
speed, all while providing users with the best prices on tokens both within-chain
and cross-chain”
In conclusion, our investment in Magpie was driven by three main factors: the need for better cross chain solutions in the market; the DeFi experience of their team members; and the product’s early effectiveness and seamless UX. Serafund believes that improvements in cross chain infrastructure are required for crypto networks to continue proliferating, and Magpie provides this while simultaneously aggregating liquidity sources to give users the best price available. We are proud to support this team and are help them perform! Be sure to check out their private alpha lunch on Ethereum, Polygon, BNB, and Avalanche and stay tuned for their public testnet!