Why interoperability is important for DeFi?
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Why interoperability is important for DeFi?
Rather than being constrained by an overly inflated bubble, it's better to divert part of the excess liquidity elsewhere.
Navigating Web3 tides with focused insightsAuthor: Haotian
Once DeFi became labeled as "matryoshka" (nested protocols), Ethereum had already entered its late stage of "consensus overload."
Now, to counter the impact of high-performance emerging chains like Solana, Ethereum has more than just defending DA orthodoxy and expanding its Rollup Layer2 ecosystem — there's another path: unleashing liquidity across chains through interoperability.
Indeed, rather than being strangled by an overinflated bubble, why not offload part of that overloaded liquidity? Let these established DeFi brands extend their reach into a multi-chain environment, forming a new kind of "competitive moat."
Today’s focus is @Entanglefi, which aims to solve cross-chain liquidity issues in DeFi. At first glance, it sounds similar to @LayerZero_Labs or @cosmos — so what sets different interoperability solutions apart? How exactly does Entanglefi tackle complex oracle challenges in cross-chain DeFi operations? Next, I’ll analyze from a business narrative perspective why interoperability matters so much for DeFi.
Cosmos uses SDK and the IBC protocol to solve interoperability between heterogeneous blockchains, serving as infrastructure for multi-chain connectivity. LayerZero provides a general-purpose, scalable interoperability framework using cross-chain messaging and oracle tools.
In contrast, Entangle focuses specifically on DeFi ecosystem projects, offering solutions — Liquid Vaults and Oracle — to facilitate liquidity interoperability among cross-chain DeFi protocols, thereby improving capital efficiency and user experience.
Simply put, Cosmos and LayerZero offer lower-layer blockchain infrastructure-level interoperability, building foundational frameworks. Entangle, however, targets the DeFi application layer, delivering specialized interoperability capabilities tailored to DeFi priorities such as capital efficiency, transaction friction, and rational oracle price feeds.
However, achieving full integration, management, and composability of DeFi protocol liquidity across chains is no simple task. So how does it work?
1) Liquid Vaults: Entangle provides a middleware layer — a cross-chain asset vault. For example, if a user stakes liquidity in Uniswap on Chain A, they receive an LP token, which can then be deposited into the Liquid Vault. The Entangle smart contract generates a receipt (LSD). The original LP token continues earning yield on Uniswap, while this receipt becomes new portable liquidity that can be used cross-chain, combined with other DeFi opportunities to amplify returns. Currently, at least $14B worth of DEX liquidity is available for such extension and reuse.
From a user-centric standpoint, the greater the number of chains integrated at the interoperability layer, the richer the asset circulation scenarios become — especially when connecting both EVM and non-EVM heterogeneous chains. This reduces steps and complexity in cross-chain operations, minimizing transaction friction — a genuine need, particularly around wallets and bridges.
The “bridge” service offered by interoperability layers differs significantly in business logic from dedicated cross-chain protocols. Interoperability aims to move funds from Chain A to Chain B with minimal friction, focusing on enabling asset usage within DeFi ecosystems. Unlike traditional bridges where fees themselves represent friction, this model prioritizes seamless utility.
In short, Liquid Vaults act as a middleware layer, creating new transferrable tokens (LSDs) from existing DEX liquidity. This eliminates complex cross-chain procedures for users, lowers transaction friction, expands the value footprint of existing liquidity, and increases potential yields.
Underlying this are significant technical challenges: smart contract communication across heterogeneous chains, bridging assets between different chains, standardizing interfaces across native chains — all testing the system’s ability to integrate, manage, and orchestrate cross-chain communication and assets.
2) Oracle: After solving cross-chain aggregation via asset vaults, another major challenge arises — state interoperability coordination between DeFi protocols. For instance, a user stakes assets on a lending platform on Chain A, receives an LP receipt, then uses Entangle to bring that receipt to Chain B, where it’s staked again for borrowing. In extreme cases, if asset prices fluctuate sharply and oracles fail to coordinate states across both chains properly, bad debt risks emerge — e.g., the user redeems their collateral on Chain A before being liquidated on Chain B.
The key to solving this lies in the oracle pricing mechanism. Oracles must aggregate real-time on-chain and off-chain price data, applying TWAP and VWAP to deliver time- and volume-weighted prices. This enables accurate prediction of possible state changes across Chains A and B, allowing correct decisions to prevent bad debt caused by oracle delays or miscommunication.
By leveraging Liquid Vaults to reduce cross-chain friction and Oracles to manage cross-chain state consistency, coordinating these two components enables a robust interoperability solution tailored for DeFi liquidity use cases.
Why can this alleviate Ethereum’s DeFi consensus overload? The logic is straightforward:
1) Single-chain DeFi stacking has inherent limitations: Performing nested DeFi strategies and restaking within one chain restricts liquidity to boost future yield expectations. While this creates new profit opportunities, it also locks up assets, preventing them from participating in other potentially profitable investments.
2) Cross-chain liquidity expansion: Interoperability allows assets already utilized on Chain A to flow to other chains, combining with local liquidity pools to seek additional value. This brings capital and activity to new chains while relieving pressure on the original chain.
3) Once DeFi protocols achieve stable operation, their scale of funds, user base, and yields become intangible brand and reputational assets. Extending this brand presence across chains via interoperability represents indirect brand enhancement. It avoids the hesitation many legacy brands have about expanding to new chains and sidesteps the risks and costs associated with starting from scratch.
We can all sense that both Data Availability and Interoperability spaces are already fiercely competitive. On one hand, Ethereum seeks to defend its boundaries, yet is inevitably being challenged by modular design paradigms. On the other hand, interoperability appears to be an opportunity with only upsides.
Even if Ethereum eventually becomes just one “DeFi module foundation” among many, its position remains unshakable.
Note: Interoperability is indeed a direction worth watching. Chainlink was the pioneer; LayerZero is complicated; Wormhole and ZetaChain also deserve attention — will dive deeper later.
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Haotian | CryptoInsight
