DeFi is still very much in its nascency, and with this nascency comes a large set of issues that need to be worked on gradually. Two of the more prominent issues in DeFi are the user experience (UX) & the capital inefficiencies. One of the primary causes of these issues is fragmented liquidity.
We have 50 different chains and 20 different layer 2 solutions (bit of an exaggeration but you know what I mean), naturally, money will be spread across these silos as users hunt for the most profitable venues. To dampen the fragmentation of liquidity, bridges and cross-chain protocols arrived. While they are good for moving money around, they are often expensive and slow. When you bridge to another chain you have to then manually carry out the activities you wish to do, be it lending, swapping, or anything else.
To improve this came along a category known as omnichain, spearheaded by the LayerZero team. It’s effectively a cross-chain solution that levelled up the bridging UX by allowing for instant guaranteed finality (thanks to the delta algorithm). Upon this architecture, a ton of projects have been made which allow you to perform activities such as lending & swapping on multiple chains directly through their platform.
The Hermes Protocol is also entering the omnichain world as part of their V2 upgrade. They are creating a liquidity hub which connects you to multiple chains through one venue, and this venue is called Ulysses.
Ulysses allows users to access different omnichain apps performing actions like directly swapping native tokens between chains, managing liquidity across multiple chains, accessing yield from multiple chains, and deploying incentives on multiple chains all from one venue. Through Ulysses not only do users benefit from the superior capital efficiency and UX, but it also reduces the operational and management costs of protocols deployed on multiple chains.
All of this is made possible with their unique architecture consisting of Virtualized liquidity & unified liquidity management. Both factors go hand in hand in this system so let’s understand the architecture step by step.
The backbone of Ulysses is the ports.
You’ve probably seen people compare blockchains to cities and how bridges connect these cities to one another. Building upon this analogy, let’s think about blockchains as countries, with each chain having its own set of advantages and disadvantages. A pivotal part of a country’s economy is trade, and how does one facilitate trade? Through ports.
Each country has its own port through which goods are onboarded and offloaded, and all of this is done through connection with one main port which acts as a global or regional hub. The port system in Ulysses is no different. Each chain has an affiliated port through which assets are deposited or withdrawn from the chain.
But when participating in trade, there is a certain established standard for goods determining what is allowed to be imported or exported. Similarly, this omnichain system has omnichain tokens which are held in these ports for deposits and withdrawals. The ports are essentially vaults with single asset pools for each omnichain token that is active on a given chain.
As mentioned earlier, in the real world you typically have individual ports and a main hub. Similarly, on Ulysses you have two types of ports, Branch ports & Root ports.
Each chain has a branch port, this branch port serves the connected branch router. When there’s a user request or a system response, the router calls the port and requests withdrawals, deposits, or interactions with the virtualized token contracts.
The root port is the hub which is present on the root chain. This port is connected to all routers and is responsible for maintaining the global state of the virtualized tokens. It must have a registry of all the mappings and addresses. The addition, removal, or verification of tokens at any point in this omnichain system has to go through this contract.
Similar to the ports there are also 2 routers, the branch router and the root router.
The ultimate purpose of the router is to act as the intermediary between the user and the system. The branch routers are the user-facing ones. They provide the entry and exit points for users of the omnichain system. The root router is present only on the root chain and communicates with all the different branches. They are mainly in charge of communicating with the ports to keep track of pending user settlements.
Described above is the backbone of Ulysses, the technical architecture of how everything works. But in practice, when you use the hTokens, the Hermes omnichain tokens, it is done so through virtual liquidity. Virtual liquidity is essentially the mirroring of assets.
The assets in question can be locked on their respective chain and the mirrored asset gets released which allows for unmatched composability. You can provide liquidity, do swaps, and earn revenue while the assets are locked on the source chain. This additionally brings down costs for protocols since they will only need to incentivize liquidity for a single unified liquidity token (the hToken) rather than having incentives scattered across the ecosystem for different pools.
The second part of Ulysses is the Unified liquidity management system.
There are two facets to this unified liquidity system. Ulysses Unified Pools & Ulysses Unified Tokens.
The Ulysses unified pools are what allow for enhanced composability and seamless cross-chain trading. They are single-sided staking liquidity pools that can interact with any number of other Ulysses pools for trading.
The primary difference between Ulysses and other omnichain products is that Ulysses LPs reside in Arbitrum. While Arbitrum offers speed and cost-effectiveness, there is a trade-off made with composability outside of Arbitrum. This means that when transactions are executed in Arbitrum the protocol can guarantee finality but when trading from other chains the protocol cannot guarantee finality until the transaction has been approved in the omnichain environment. However, anyone can route trades between multiple Ulysses LPs from different chains in the same execution environment, without any additional cross-chain calls.
Each unified liquidity LP handles only one single token from a specific chain and these LPs are connected to one or more other unified liquidity LPs. However, an issue that must be taken into consideration is liquidity. To ensure that this complex cross-chain system has enough liquidity there is a rebalancing fee that has been introduced. This fee can be zero, positive, or negative depending on the action and bandwidth of the pool as well as available liquidity on the receiving chain.
The second part is the Ulysses unified tokens. This is what users will interact with most often and can be used for a variety of things ranging from trading, to adding liquidity, earning rewards, paying incentives, depositing collateral, lending assets, and much more.
The unified tokens allow users to access liquidity pools from multiple chains in a single, unified token. These tokens are wrappers of two or more Ulysses Liquidity Pools from different chains allowing them to be accessed by a Dapp from any chain. However, these tokens do not necessarily need to be Ulysses LPs although they are designed for them, they also support any ERC-20 token which can also be used for things like trading, adding liquidity, providing liquidity, and whatever else is possible.
All of this covers everything you need to know about Ulysses.
LayerZero pioneered the omnichain movement and changed the cross-chain transfer game with Stargate Finance. Protocols such as TapiocaDAO followed suit to create things like Omnichain lending on LayerZero and there is now an ecosystem of products.
As you may know from our previous editions covering Maia DAO and Hermes, they have a prolific team. This highly skilled team is now looking to leave their mark in the Omnichain world with Ulysses. As you can see it is a best-in-class product which is set to significantly improve the issues of fragmented liquidity and capital efficiency. By solving that, we are set to see a significant improvement in the DeFi user experience all thanks to Hermes.
Keep a keen eye on this one.