Cross-Chain AMM

Cross-Chain AMMs utilize specialized liquidity pool designs that differ from single-chain models. The core challenge is managing assets that exist on separate, non-communicating ledgers.

• Asymmetric Pools: Many protocols (e.g., THORChain) use pools where one side is the network's native gas/utility token (e.g., RUNE), paired with various external assets. This simplifies cross-chain settlement logic.
• Vault-Based Architecture: Instead of a single smart contract, liquidity is often held in secured vaults or multi-sig wallets on each supported chain, controlled by a decentralized validator set.

The cross-chain messaging layer is the critical infrastructure that enables swap instructions and proof-of-settlement to be communicated between blockchains.

• Key Protocols: IBC (Inter-Blockchain Communication) is used by Cosmos-based chains. Axelar GMP and LayerZero are generalized messaging protocols often integrated by AMMs.
• Settlement Flow: 1) Asset is locked on Chain A. 2) A cryptographic proof is relayed to the coordinating protocol. 3) The protocol authorizes the release of the destination asset from a vault on Chain B. This creates a atomic swap guarantee when possible.

A key distinction in cross-chain trading is between using bridged/wrapped assets and trading native assets.

• Bridged Assets (e.g., wBTC, axlUSDC): Represent a token on a non-native chain, backed by a custodian or smart contract lock on the source chain. Many liquidity bridges create these.
• Native Swaps: Cross-Chain AMMs like THORChain aim for direct native swaps—you receive actual BTC to a Bitcoin address, not wrapped BTC on Ethereum. This reduces counterparty risk and composability fragmentation but requires more complex infrastructure.

Liquidity is split across multiple chains and bridge pools, increasing slippage and reducing capital efficiency. This fragmentation creates arbitrage opportunities that can be exploited to drain liquidity from one side of a pool. Risks include:

• Asymmetric liquidity: A large cross-chain swap can disproportionately drain a destination pool before rebalancing occurs.
• Front-running: Bots can observe pending cross-chain transactions and execute trades on the destination chain first.
• Price impact: The effective exchange rate for a user can be significantly worse than quoted due to multi-hop routing and thin liquidity on one chain.

The system's complexity grows exponentially with each supported chain. A Cross-Chain AMM involves multiple smart contracts (one per chain) that must interoperate flawlessly. This increases the attack surface. Key concerns are:

• Reentrancy attacks across chain boundaries via callback mechanisms.
• Logic inconsistencies between chain-specific contracts leading to state desynchronization.
• Upgrade risks: A governance attack or buggy upgrade on one chain can compromise the entire system.
• Unforeseen chain-specific behaviors, such as differing gas cost models or block times, affecting transaction ordering.

The validators or relayers responsible for passing messages between chains can censor transactions. While often permissionless in theory, many bridges rely on a limited, permissioned set for speed and cost. This creates centralization risks:

• Transaction censorship: Relayers can refuse to process transactions for specific users or tokens.
• Governance capture: A malicious actor could gain control of the validator set to halt operations or approve fraudulent transactions.
• Network failure: If relayers go offline, assets can be temporarily frozen, breaking the AMM's core functionality.

The economic design of cross-chain incentives can be manipulated. Liquidity providers (LPs) and arbitrageurs are essential for rebalancing, but their actions can be exploited.

• Timing attacks: An attacker could deposit liquidity, trigger a large imbalancing cross-chain swap to inflate LP fees temporarily, and then withdraw—a form of fee farming that harms other LPs.
• Liquidity mining manipulation: Incentive tokens distributed for cross-chain liquidity can be gamed by quickly moving capital between chains.
• Withdrawal race conditions: During a crisis, LPs may race to withdraw, exacerbating liquidity shortages and increasing slippage for remaining users.

The multi-step process of a cross-chain swap creates more opportunities for user error and phishing. Unlike a single-chain swap, users must approve and sign transactions on multiple chains, interacting with unfamiliar interfaces.

• Phishing websites mimicking popular bridge UIs to steal private keys or approval signatures.
• Transaction misdirection: Users might send assets to the wrong chain or bridge address, resulting in permanent loss.
• Gas estimation failures: Needing native gas tokens on the destination chain to complete a swap adds complexity; users can get their assets stuck if they lack funds for the final transaction.

The process of sourcing liquidity from multiple pools or chains to achieve better swap rates and lower slippage. Cross-chain AMMs often act as aggregators, splitting a user's trade across:

• On-chain DEXs on the source and destination chains.
• Bridge liquidity pools for the cross-chain transfer.
• Their own canonical pools on each supported chain. This maximizes capital efficiency and improves the user experience.

A specific bridge model where an asset has a single, official wrapped representation on a foreign chain, as opposed to multiple, non-fungible bridged versions. Cross-chain AMMs that support canonical assets (e.g., Wormhole-wrapped assets, Circle's CCTP for USDC) reduce fragmentation, increase liquidity depth in their pools, and minimize user confusion about which bridged token to use.

Critical trading concepts that are amplified in cross-chain contexts. Slippage is the difference between the expected and executed price of a trade. In a cross-chain swap, total slippage is the sum of:

• Impact on the source chain AMM.
• Fees and spreads on the bridge transfer.
• Impact on the destination chain AMM. Understanding this helps users set appropriate slippage tolerance for multi-step transactions.