While blockchain, the underlying technology behind cryptocurrencies and NFTs, ushered in lightning-fast transactions with sub-penny fees, the technology comes with its own set of inefficiencies — and multi-chain interoperability is a major one.
To enable two sovereign blockchain protocols to communicate with one another — and for their native assets to be able to cross networks — developers are relying on cross-chain bridges. As their name suggests, these off-chain solutions are bridging different blockchain ecosystems, by swapping a user’s assets from the source chain to a wrapped crypto asset on the target chain.
But beyond widespread security concerns, the inefficiencies of existing blockchain bridges are becoming apparent — especially their lack of transaction finality. Below we’ll explore the importance of transaction finality compared to transactions per second (TPS).
The Importance of Cross-Chain Finality for DeFi
So what is transaction finality in the first place? In the blockchain space, it refers to the amount of time required for a cryptocurrency transaction to be executed, with a reliable guarantee of its validity.
For instance, on the Bitcoin network, transactions become immutable after six blocks are generated. Considering Bitcoin’s 10-minute block time, transaction finality takes about an hour — which makes Bitcoin highly impractical for day-to-day transactions, without the Lightning network or other layer-2 solutions.
Depending on the blockchain network, its number of validators, block time, and consensus mechanism, this can vary significantly. For most existing blockchain bridges, the lack of finality has become a growing issue, creating inefficiencies for multi-chain decentralized applications (dApps).
While many blockchain bridges claim to be able to handle thousands of transactions per second (TPS), they’re usually quiet about their actual transaction finality, and for a good reason. Regardless of the amount of TPS a protocol can handle, its scalability and user adoption really comes down to the finality of the transactions, which is when a crypto transaction becomes irreversible.
In simple terms, a protocol’s TPS refers to its theoretical processing power, but finality is the actual time it takes for Bob’s crypto transaction to settle in Mary’s wallet. So, while TPS can be used as a metric to measure a blockchain’s overall maximum throughput, finality is what determines the duration for a crypto transaction to finalize on a given protocol.
Finality is also what determines the latency of a protocol, which is the time that users have to wait from initializing to finalizing a crypto transaction. This is what end-users perceive as the ‘speed’ of the transaction, instead of the theoretical maximum output measured in TPS.
Fast finality is even more important for blockchain bridges, considering the complexity of cross-chain asset swaps. Most existing bridges use a burning and minting mechanism, which locks a user’s crypto into a digital vault while minting and issuing its equivalent amount of wrapped crypto on the destination chain. This complex mechanism makes cross-chain asset swaps take longer than on-chain transactions, but a bridge with slow finality can make this even worse.
Imagine if cross-chain swaps would take an hour or more, as on the Bitcoin network. It would make it impossible for crypto traders seeking cross-chain opportunities to capitalize on the short-term swings of the market. This would also discourage the free flow of cross-chain assets, decreasing capital efficiency in the crypto space and making cross-chain liquidity farming nearly impossible.
Lastly, a slow finality bridge would discourage end users, who are accustomed to lightning-fast transactions on user-friendly payment apps. For DeFi to become a mainstream alternative to the legacy financial system, cross-chain bridges have to foster fast-finality transactions, hence reducing the time delay for users performing cross-chain asset swaps.
Need for Speed: Cross-Chain Finality
Here’s the thing: DeFi needs fast finality cross-chain protocols to improve upon its performance bottlenecks, and create the necessary transaction speed for mass user adoption. Current slow-finality bridging solutions are significantly hurting the user experience of cross-chain applications, hence curbing the potential behind decentralized finance.
On the bright side, next-generation bridging solutions with faster finality are arising. One such solution is Magpie, a cross-chain liquidity aggregator that enables cost-efficient cross-chain asset swaps with near-instant finality.
Magpie ditches the inefficient minting and burning mechanism of standard centralized bridges. Instead, the protocol leverages bridges to signal cross-chain asset swaps while sending the wrapped assets from their chain-specific liquidity pools. The result is a safer and more user-friendly asset swap, and transaction finality only takes 2 blocks or a few seconds.
Decentralized finance apps are only as good as the cross-chain bridges they rely on. This is why the mass adoption of DeFi will greatly depend on the finality and user-friendliness of tomorrow’s cross-chain bridges.