Entering an established market is a double-edged sword. On the one hand, you’re facing industry leaders, but on the other, you have the advantage of hindsight.

This hindsight is particularly powerful in an industry like crypto that changes quickly. Take bridges, for instance. Three years ago, bridges were designed to cater to an ecosystem with a handful of major chains. Back then, the idea of a multi-chain future was just that — an idea. Fast-forward to today, and many believe we’re moving towards a future with millions of chains.

The first-gen bridges are now struggling to keep up with the proliferation of new chains, forcing them to undergo upgrades to meet the evolving needs of the ecosystem.

But imagine starting from scratch, armed with current insights and a clear vision of the ecosystem’s needs.

Enter Catalyst, the new kid on the modular blocks.

Catalyst bills itself as ‘the modular liquidity engine’ designed to move assets across a fragmented modular ecosystem.

This article zooms in on Catalyst’s approach to overcome the constraints of traditional bridges, and building a scalable solution for the liquidity requirements of today’s modular multi-chain ecosystem.

Let’s dive in!

The Catalyst Vision

Catalyst envisions a future with millions of chains. One of the major challenges these chains will face is interoperability — without it, these new chains remain isolated, unable to tap into the users and liquidity of other chains.

To bridge this gap, Catalyst secured $4.2 million in funding to build a liquidity engine tailored for a future with countless chains.

The Catalyst team is building a cross-chain AMM that has three superpowers to connect the modular ecosystem:

Automatic and Quick Support for New Chains

Catalyst AMM can easily integrate new chains as they launch, connecting them with the chains already in Catalyst’s network of chains. The protocol is designed to be lightweight, enabling quick and easy deployment on new chains.

This feature ensures that even the newest chains gain immediate access to the broader ecosystem with Catalyst, echoing their posts on X — ‘New chains should provide opportunities, not obstacles’ — giving users early access to new chains without hassle.

According to the Catalyst team, this design allows supporting new chains 10–50x quicker than competing cross-chain protocols.

Permissionless Pool Creation

Catalyst allows any chain to set up a liquidity pool between two chains permissionlessly. This enables new chains to list their assets and create a pool on Catalyst.

For instance, a new chain built with Rollups-as-a-Service (RaaS) tooling can use Catalyst as a ‘liquidity module’. This allows them to create liquidity pools with established chains at launch and onboard users. (Note: the liquidity module feature is expected to launch at the end of 2024).

This open and permissionless model levels the playing field, granting equal access to liquidity to all chains. It solves a major problem for the new and slightly left-field chains that have otherwise been isolated from the mainstream ecosystem.

This approach means Catalyst can support a wide range of assets, including those that may not be available on other exchanges, as the only pools exist on Catalyst.

Extensible to Any Chain, Without Restriction

Catalyst’s system is built to adapt and facilitate asset transfers between a diverse range of blockchain environments. This means that Catalyst is equipped to facilitate liquidity transfers across a chain that operates as a rollup, an EVM-compatible chain, a Cosmos chain, or any other format.

Source: Universal cross-chain liquidity for millions of chains | Jim, Catalyst (Celestia Spotlight #5)

While many existing bridges are confined to a single type of blockchain environment (predominantly EVM chains), Catalyst sets itself apart by supporting all types of chains.

Now, let’s examine the tech stack that brings Catalyst’s ambitious vision to life.

The Catalyst Tech Stack

Catalyst’s technical architecture can be broadly divided into three parts:

The Liquidity Engine

At the heart of Catalyst’s design are the borderless Vaults, which house liquidity across various chains. When interconnected, these vaults create a network of pools that enable the exchange of any asset for another across chains.

Catalyst Vaults. Source: Catalyst Docs

This provides a high degree of flexibility for users as they can use the liquidity in Catalyst Vaults for different types of swaps:

• Same-chain swaps — swap ETH to USDC locally on Ethereum.
• Cross-chain swaps — swap MATIC on Polygon for BNB on BNB Chain. These swaps are slow as they depend on the source chain reaching full finality, which can take around 15–30 minutes.
• Fast swaps (Underwriting), commonly known as intent-based swaps — these are quick cross-chain swaps conducted by Underwriters (also referred to as Solvers in intent-based protocols) who front users the desired assets on the destination chain. These swaps are typically completed within 30 seconds to 1 minute.
• Logic dependent, more generalized intent-based swaps — these are conditional transactions, such as exchanging assets to acquire an NFT on Stargaze, contingent on the price being below a specified limit.

Unit of Liquidity

Catalyst introduces a novel ‘Unit of Liquidity’ (UoL) concept to facilitate these swaps seamlessly. Here’s an overview of the UoL and its role within Catalyst’s design:

The Unit of Liquidity serves as a virtual measure of an asset’s value represented as ‘Units.’ This abstract unit acts as a universal accounting tool, simplifying asset valuation and exchange process across disparate pools and chains on Catalyst.

The value abstraction is referred to as the Unit of Liquidity. Source: Explaining the Unit of Liquidity

Think of the UoL as a receipt. When users deposit assets into Catalyst, they receive Units corresponding to their deposit’s value. These Units can be redeemed for assets of equivalent value on the same chain or across other chains.

Let’s understand how the Unit of Liquidity works with the help of an example. Imagine Alice wants to swap 10 BTC for ETH using Catalyst. Here’s how the Unit of Liquidity facilitates this transaction:

As illustrated, the UoL only serves as a stable intermediary value that simplifies the exchange process across different assets and chains without directly comparing the fluctuating values of BTC and ETH.

The Message Aggregator

Catalyst’s message aggregator serves as a cross-chain message router that uses different interop protocols like IBC, Wormhole, Polymer, and others. It offers a unified interface for Catalyst (or another protocol building on top) to transfer messages across chains via any messaging protocol that it supports. It is designed to be bridge-agnostic, ensuring there’s no dependency on a single provider and prioritizing the best messaging protocol available for any two chains.

The Messaging Aggregator connects all the Catalyst pools across chains and facilitates the transfer of the Unit of Liquidity (UoL) values between them.

The Message Aggregator connects all Catalyst pools. Source: Explaining the Unit of Liquidity

In essence, Catalyst can have pools on any chain that one of the messaging protocols in its stack supports. This allows Catalyst to support a wide number of chains, in contrast to other solutions that are often limited to the chains supported by a specific messaging protocol.

Catalyst Transaction Lifecycle

Let’s break down how a cross-chain swap works using Catalyst, with Alice exchanging ETH on Ethereum for MATIC on Polygon as an example:

Step 1 — Asset conversion to Units

Alice deposits her ETH into the Catalyst Vault on Ethereum, which is locked in escrow. The value of her ETH is then converted into Units using the Unit of Liquidity concept.

Source: Anatomy of a Catalyst Swap

Step 2 — Sending the swap details across chains

The Vault sends a message with the details of Alice’s swap to the cross-chain interface (CCI). The CCI packs the swap message into bytes compatible with any virtual machine (VM) on the destination chain (Polygon in this case).

The message is then sent to Catalyst’s message router, where a messaging protocol (like Wormhole or Polymer) relays it to Polygon.

Source: Anatomy of a Catalyst Swap

Step 3 — Units are converted to desired assets

The CCI on Polygon receives the message and unpacks the bytes to determine what Alice wants to swap. The swap message includes information such as the number of Units, which asset to buy, and the destination wallet address.

The Vault on Polygon uses the information to convert the Units into the desired asset, which is MATIC in this case. The MATIC is then sent to the user’s designated wallet to complete the swap.

This process depicts a regular swap via Catalyst, typically taking around 20 minutes. For a faster swap, there’s an ‘Underwriting’ service where Underwriters front users the desired assets on the destination chain in return for a fee. This type of swap usually takes 30 seconds to a minute and costs an extra 0.1% fee.

Source: Catalyst app

Bull vs. Bear Case for Catalyst

Here’s an analysis of what could go right (bull case) and the potential hurdles (bear case) that Catalyst might face:

Bull Case

• Many new chains use Catalyst to bootstrap liquidity — New chains, whether they’re Layer 3 or Layer 2, face a big challenge with interoperability — connecting with the wider ecosystem and attracting users and funds from other chains. Catalyst offers a solution with its permissionless pool creation and support for any virtual machine. This could be a game-changer for new chains tackling interoperability and liquidity issues, possibly leading to Catalyst’s widespread adoption.
• Catalyst offers Day 1 support for the hot new chains — Catalyst’s ability to quickly support new chains as they launch could be a major advantage. If Catalyst can consistently be the first bridge to support new chains right after they go live, it could dominate a market that’s still up for grabs. This capability and scaling to support numerous chains position Catalyst as a valuable asset for bridge aggregators like LI.FI. This synergy allows LI.FI and partners like Jumper early access to new chains through Catalyst, while Catalyst benefits from LI.FI’s distribution and Jumper’s user base.
• Catalyst as the liquidity engine for the modular ecosystem — As more and more chains go live in the coming years and get added to Catalyst’s roster of supported chains, we could reach a point where Catalyst is one of the few solutions in the market that supports moving assets from Ethereum and its L2s, L3s, Cosmos chains, Solana, Celestia ecosystem, and more. This would position Catalyst as a unified connection layer, linking numerous chains with billions in its liquidity pools. In the future, we could potentially even see different applications built on top of Catalyst to leverage this vast pool of liquidity and chain connectivity.

Bear Case

• Limited proliferation of modular chains — Catalyst’s success is predicated on a future landscape with thousands of chains. Yet, if the industry consolidates around a few dominant chains or the proliferation of chains fails to materialize, Catalyst may struggle to hold its ground against well-established competitors in the market.
• Catalyst faces stiff competition and struggles to see adoption — While new chains need interoperability solutions, the market is already saturated with bridges offering similar services (albeit with different models that have varying tradeoffs). For instance, Catalyst has a unique value proposition with its permissionless pools feature but its appeal may diminish if a new chain chooses to adopt a bridge token standard like LayerZero’s OFT or Axelar’s ITS. Moreover, even on the direct-to-user side of things, with established bridges like Across, Stargate, Connext, and more already serving a significant user base, Catalyst could struggle to attract users without the flawless execution of its chain expansion strategy.
• Scaling challenges — Catalyst aims to connect any two chains, regardless of the blockchain environment (VM, consensus mechanism, etc.). This ambitious goal is commendable but comes with complex technical challenges. Overcoming these could be difficult and impede Catalyst’s ability to add support for new chains quickly.

Closing Thoughts

The modular vision creates more chains, more chains create fragmented liquidity, fragmented liquidity creates disconnected chains and poor UX, and poor UX calls for a modular liquidity engine like Catalyst to bridge the gaps.

Setting aside my humble attempt at eloquence, I believe Catalyst possesses the essential elements for success:

• The team — Catalyst has a crypto-native team led by co-founder Jim and Alexander, who both have a deep understanding of interoperability. Jim’s insights into the evolving modular ecosystem and Alexander’s passion for math and AMMs form a strong leadership core to drive the development of a scalable cross-chain AMM.
• The timing — the number of chains in the ecosystem is growing at a rapid rate — a trend that’s expected to intensify. As these chains proliferate, the demand for solutions like Catalyst, which can seamlessly connect them, becomes increasingly clear.
• The product — Catalyst has developed a product with the potential to scale and meet the liquidity demands of a modular ecosystem with millions of chains — at least in theory. Its real-world performance remains to be seen.

Over the coming months, Catalyst’s progress and adoption will be interesting to observe. We at LI.FI will be watching closely, as Catalyst’s cross-chain capabilities could significantly enhance our aggregation toolkit.

What are your thoughts on Catalyst’s potential impact on the ecosystem? Will it find a place amidst the abundance of bridges, or could it struggle to see traction? Share your views in the comments!

Disclaimer：

1. This article is reprinted from [Medium]. All copyrights belong to the original author [Arjun Chand]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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