Zephyr Cross-Chain Bridge Proposal

Objectives

• Onboarding: let MetaMask and Trust Wallet users buy and use Zephyr assets through wrapped ERC-20 tokens.
• Discoverability: route through DEXs and aggregators so Zephyr appears where users already trade.
• Accessibility: deliver a simple, fast bridge experience.
• Price integrity: keep LP pricing close to native markets.
• Security-first: minimize blast radius and keep the native protocol untouched for v1.
• Capital efficiency: achieve reasonable TVL for sub-$50k swaps with low friction.
• Operational realism: define keepers, arbitrage flows, monitoring, and public stats.

Bridge as Mobile Wallet Substitute

A well-executed cross-chain bridge plus wrapped assets can deliver most of the user-facing benefits of a native mobile wallet. It immediately exposes Zephyr to MetaMask, Trust Wallet, and the wider DeFi surface on iOS and Android, dramatically lowering onboarding friction without pausing core protocol work to build and maintain our own mobile app.

Wrapped tokens lack native privacy features, but for 80–90% of prospective users and investors a bridge plus wrapped assets removes the major onboarding pain (desktop wallet, exchange withdrawal, multi-step conversions). It puts Zephyr where users already are: mobile EVM wallets and DeFi venues.

A smaller privacy-centric cohort will still prefer a native mobile wallet for private transfers; that remains strategic, but it is not the main blocker to growth. Wrapped ZSD retains decentralized, crypto-backed features while representing a private stablecoin under the hood. Success in this effort can also attract native wallet partners (e.g., Cake Wallet) for full integration.

CEX Integrations

Losing privacy features with wrapped tokens helps alleviate regulatory concerns that limit large exchange support. Tokenization lowers the bar for listing on major CEX platforms because no Zephyr-specific implementation is required.

1. Target Chain: Ethereum

Ethereum L1 launches first for maximum reach and integrations. Arbitrum or other L2s follow once the rails prove out.

Ethereum L1

• Pros: largest DeFi user base, deepest USDT/USDC liquidity, plug-and-play integrations (Uniswap, Curve, 0x/1inch, dashboards), strongest narrative credibility.
• Cons: higher gas costs, greater POL requirements for swaps, larger communications burden.
• Wins when: we need immediate legitimacy, the widest funnel, and broad aggregator coverage.

Arbitrum and Other L2s

• Pros: low gas (friendly to smaller users and frequent harvests), vibrant stable pools, fast iteration, grants and BD support.
• Cons: smaller dollar liquidity, extra bridging leg from L1, missing protocols or tooling.
• Wins when: we prioritize low-fee UX and can seed initial depth ourselves, then backport to L1.

2. Asset Scope and Staging

Stage 1 (Must-have)

• wZSD: wrapped ZSD
• wZYS: non-rebasing wrapped ZYS with price accrual versus wZSD.

Stage 1.1 (Nice-to-have)

• wZEPH: wrapped base asset for routing and price discovery.
• wZRS: wrapped leveraged reserve share.

Stage 2

• yZSD: ZSD-denominated income token paying wZSD; powered internally by wZYS. Mint/redeem ≈ 1 wZSD per token.

Notes on wZEPH and wZRS

• Not critical to Stage 1 because wZSD and wZYS unlock immediate utility.
• Expand accessibility by letting new entrants acquire base exposure directly if wZSD and wZYS drive demand.
• Share wrapping and bridge infrastructure with minimal incremental engineering cost.

3. AMM Topology (Uniswap v4 + Hooks)

Uniswap v4 with hooks offers features that align well with Zephyr’s needs: dynamic fees, TWAMM, and stable-like behavior with lower gas and broad adoption. Hooks tie directly into reserve-ratio mechanics. The trade-off is owning and auditing more code.

Treasury liquidity is limited compared to typical token launches, especially in USDT. We can readily convert reserve funds into native assets, but the reserve ratio and minting limits cap stable liquidity seeding. Community liquidity incentives should balance LP rewards with accurate, fair pricing. The goal is not to profit from LP markets but to build resilient rails.

Policy Hook v1 — Minimal Feature Set

• Dynamic fees: base fee plus coefficients for oracle deviation and realized volatility.
• Auto re-center: keeper nudges ticks when TWAP deviates beyond thresholds, time-sliced to reduce MEV.
• Inventory tilt: widen or tilt stable pools when wZSD inventory tightens; reduce inner-tier exposure during high volatility for wZEPH.
• Events: emit policy changes and parameters for dashboards.

4. Pools, Fee Tiers, Initial TVL, and Liquidity Tiers

We seed protocol-owned liquidity (POL) and invite outside LPs using concentric tiers with increasing width and fees.

Stage 1 (Must-have)

A) wZSD / USDT — “Dollar Rail”

• Fee target: 0.03–0.05%.
• Example $100k TVL MVP allocation:
  • Tier 1 (tight): $20k at ±0.5% around $1.
  • Tier 2 (mid): $40k at ±1.0%.
  • Tier 3 (outer safety): $40k at ±2.0%, fee ≈ 0.05%.
• Scale target: $300–500k TVL as flow grows.

B) wZYS / wZSD — “Growth-pegged”

• Fee target: ≥0.05%.
• Example $50k MVP allocation: $15k inner (±0.75%), $20k mid (±1.5%), $15k outer (±3%).
• Keeper: re-center on oracle/TWAP drift beyond policy thresholds.

Stage 1 Extensions

C) wZEPH / wZSD — Volatile Base Market

• Fee target: 0.30% with policy-driven increases in high volatility.
• Example $75–100k MVP allocation:
  • Tier 1 (tight): $10–15k near price; limited notional to avoid farming.
  • Tier 2 (mid): $30–40k in a wider band.
  • Tier 3 (outer): remainder in a wide catch-all range.

D) wZRS / wZEPH — Leveraged Share vs Base

• Fee target: ~0.30%.
• Wide range with UI guidance about RR-driven price drift relative to native markets.

Stage 2

E) yZSD / wZSD — Par Convenience Pool

• Fee target: 0.01%.
• TVL target: $50–100k to support mint/redeem parity and instant exits for aggregators.

5. Mint and Redeem Policy Mapping to Reserve-Ratio States

We mirror native protocol rules on the bridge and make them explicit in the UI. Hooks update liquidity positions as reserve-ratio (RR) states shift.

• rrCRISIS: <100% (peg impaired).
• rrLOW: 100–400% (tight).
• rrMID: 400–800% (normal).
• rrHIGH: >800% (over-reserved).

Native constraints:

• ZRS mint disabled when RR > 800%; redeem disabled when RR < 400%.
• ZSD mint disabled when RR < 400%.
• ZYD yield halted when RR < 200%.

6. Cross-Chain ZSD Yield Mechanism

Stage 1 launches non-rebasing wrapped assets; Stage 2 introduces a yield-aware token.

Stage 1 — wZYS (Simple Wrapped Share, Non-rebasing)

Mirrors native ZYS behavior. Price rises with the native ZYS:ZSD exchange rate. Users realize yield when they sell or unwrap; balances stay constant.

Pros

• Aligns with existing ZYS design: growth exists in price, not balance.
• Lower complexity and attack surface—ideal for bridge launch.
• Clean pricing topology leveraging wZYS/wZSD and wZSD/USDT pools while abstracting hops in the UX.

Cons

• Feels non-yielding to users watching balances; requires education and UI framing.
• Users must sell or unwrap to realize gains.

Stage 2 — yZSD (Yield-Aware, ZSD-Denominated Income Token)

A ZSD-denominated income token paying wZSD distributions on a cadence (default weekly). Holders mint or redeem at ~1 wZSD per token; balances stay constant while yield arrives as wZSD. Internally the vault allocates to wZYS to capture appreciation that funds payouts.

Why It Matters

• Not a wrapped or rebalancing ZYS—positioned as a ZSD-priced income product powered by wZYS.
• Users think in dollars: par ≈ 1 ZSD, yield paid in ZSD mimics familiar experiences such as aUSDC.

Required Markets

• wZSD/USDT (stable pool anchoring the dollar rail).
• wZYS/wZSD (growth-pegged pair sourcing yield).
• yZSD/wZSD (stable pool for instant liquidity).

Pros

• User-friendly yield: stable principal in ZSD with cash yield in ZSD.
• Clear narrative versus aUSDC: “a yielding ZSD note powered by ZYS.”
• Separates UX from ZYS mechanics, avoiding shrinking-balance confusion.

Cons

• More moving parts: harvest policy, distribution math, TWAP limits, and RR awareness.
• Depends on Stage 1 success with wZYS and its market.

yZSD Vault

The yZSD vault issues yZSD, holds backing assets (a wZSD buffer plus wZYS as the yield engine), and pays ZSD yield on schedule.

Responsibilities

• Mint and redeem yZSD in ZSD terms (~1 ZSD per yZSD at par).
• Allocate between wZSD for liquidity and wZYS for yield.
• Harvest and convert portions of wZYS to wZSD for distributions.
• Enforce guardrails, pause rules, and safety checks to keep behavior predictable.

7. Zephyr Bridge

Custodial Approach (V1)

• Native assets (ZEPH, ZSD, ZRS, ZYS) reside in bridge-controlled wallets.
• Wrapped equivalents (wZEPH, wZSD, wZRS, wZYS) mint 1:1 on Ethereum.
• Security depends on transparent custody, public balances, and reconciliation against wrapped supply.
• A fully auditable bridge ledger publishes inflows, outflows, and wrapped supply continuously.

This approach is straightforward, avoids changes to Zephyr consensus code, and delivers the shortest path to usability.

ZephyrWrappedToken Contract

• Minting (native → EVM): mintFromZephyr(to, amount, zephyrTxHash) via MINTER_ROLE or user-paid EIP-712 claimWithSig / claimWithSignature (idempotent through usedZephyrTx).
• Burning (EVM → native): burnWithData(amount, zephDestination, nonce) emits Burned(...), idempotent via usedNonce.
• Security: role-gated minting, EIP-712 domain "ZephyrClaims", version "1"; signer rotatable via setOracleSigner.

Bridge UX

Wallet Connection

• Web3 wallets: users connect MetaMask or similar wallets.
• Deterministic mapping: each web3 wallet maps to a Zephyr address, giving users a personal deposit and withdrawal channel between chains.
• Zephyr Lite extension wallet: planned full connection experience.

Pages

• Swap
  • V1: direct web3 swaps between ETH and ERC-20 tokens.
  • V2: native coin buys (USDT → wZSD → wZEPH → ZEPH) with swap-and-burn router and optional Zephyr destination address.
  • V3: Zephyr wallet integration (web wallet or “Zephyr Lite” extension) unifying native and web3 UX.
• Wrap
  • User creates a bridge address mapped to their web3 wallet.
  • User sends native Zephyr coins.
  • Bridge generates a signed voucher.
  • User claims the voucher and submits it to the gated mint function (no bridge gas fees).
  • Optional improvement: pre-authorize future claims to reduce steps.
• Unwrap
  • User selects wrapped token, amount, and destination.
  • Bridge calls burn on the contract.
  • Bridge detects Burn events and releases native assets.
• Bridge Details
  • Display wallet balances, wrapped supply, and full bridge ledger.

Native Burns and Mints (Bridge V2)

• Native burns: straightforward—native burns could authorize wrapped mints on the EVM side.
• Native mints: require Oracle V2 with decentralized signing. Without it we face centralized counterparty risk or fragile Zephyr code changes. Long term, native mint and burn could replace wrapped tokens if implemented securely.

8. Proof-of-Reserves (PoR)

Goals

• Publicly reconcile wrapped supply on EVM with native reserves held by bridge wallets.
• Provide a dashboard showing native wallet balances and wrapped supplies.
• Offer view-only transparency via dedicated bridge accounts and published view keys.
• Publish signed key-image sets (hourly or daily) covering unspent outputs.
• Produce reserve proofs attesting that native holdings exceed total wrapped supply (with margin).
• Deliver a lightweight verifier CLI and documentation to confirm key-image integrity and matching supplies.
• Alert when the delta between EVM supply and native reserve exceeds tolerance.

9. Arbitrage (Bots and Flows)

Goal: keep EVM prices (wZEPH, wZSD, wZYS) aligned with native Zephyr and external markets, earning modest, low-risk P&L while improving user experience.

Bot Types

• CEX arbitrage (MEXC ↔ EVM): leverages MEXC ZEPH/USDT and EVM pools; works in both premium and discount scenarios.
• Pure-bridge arbitrage: uses wraps, unwraps, and native conversions (ZSD ↔ ZYS ↔ ZEPH) to align wZYS/wZSD and wZEPH/wZSD with native rates.
• Stable-peg tidy-ups: keep wZSD ≈ USDT within the stable pool and wrap/unwrap band.

Architecture

• Watcher: streams MEXC order books, Uniswap v4 pool states, oracle/native rates, and gas costs.
• Pricer: computes implied cross prices, applies fee and slippage curves per tier, outputs net edge.
• Sizer: selects trade sizes that stay within Tier 1–2 slippage budgets and service-level objectives.
• Executor: submits EVM swaps (preferably via private relays), claims mints, processes burns, and manages MEXC orders and withdrawals.
• Risk controls: enforce per-leg max notional, per-loop P&L floors, inventory caps in ZEPH/ZSD/ZYS, and stale-edge timeouts.

Thresholds (Examples)

• wZEPH routes (volatile): trigger when edge ≥ 0.8–1.0% to cover DEX fees (0.30% + 0.03%), gas, and slippage.
• wZYS routes (growth-pegged): trigger when edge ≥ 0.20–0.35% (≥0.05% fee + gas).
• wZSD/USDT (stable): trigger when edge ≥ 0.08–0.12% depending on gas.
• Break-even spread ≈ pool fees + expected slippage + (gas ÷ notional) + CEX fees when applicable.

Example Arbitrage Routes

Assume fees of 0.30% for wZEPH/wZSD, 0.05% for wZYS/wZSD, 0.03% for wZSD/USDT, and 0.10% MEXC taker. Gas is ignored in baselines and deducted afterward (~$10–$25 depending on chain conditions).

A) CEX → EVM (EVM Premium on ZEPH)

• MEXC ZEPH/USDT ask: $3.00.
• EVM implied ZEPH: $3.09 via wZEPH/wZSD × wZSD/USDT.
• Trade 1,000 ZEPH:
  • Buy on MEXC: 1,000 × $3.00 × (1 + 0.001) = $3,003.00.
  • Withdraw to native, wrap to 1,000 wZEPH on EVM (claim).
  • Swap wZEPH → wZSD at $3.09 (−0.30%): receive 3,080.73 wZSD.
  • Swap wZSD → USDT (−0.03%): receive $3,079.81.
• Baseline P&L: $3,079.81 − $3,003.00 = $76.81 (~2.56%). After $20 gas/withdrawals → $56.81 (~1.9%).

B) EVM → CEX (EVM Discount on ZEPH)

• EVM implied ZEPH: $2.94.
• MEXC bid: $3.00.
• Start with $3,000 USDT on EVM:
  • USDT → wZSD (−0.03%): 2,999.10 wZSD.
  • wZSD → wZEPH at $2.94 (−0.30%): 1,017.04 wZEPH.
  • Unwrap to ZEPH, deposit to MEXC, sell at $3.00 (−0.10%): $3,048.07.
• Baseline P&L: $48.07 (~1.6%). Execute only when edge exceeds gas and withdrawal costs.

C) Pure Bridge (No CEX) — wZYS Overpriced on EVM

• EVM wZYS/wZSD: 1.640.
• Native ZYS:ZSD oracle: 1.625.
• Sell 5,000 wZYS on EVM:
  • wZYS → wZSD at 1.640 (−0.05%): receive 8,195.90 wZSD.
  • Unwrap → 8,195.90 ZSD on native.
  • Native convert ZSD → ZYS at 1.625 (+~0.05% cost): 5,000 ZYS for 8,129.06 ZSD.
  • Wrap → 5,000 wZYS and return to EVM.
• Profit: 8,195.90 − 8,129.06 = 66.84 wZSD (~0.82% on notional). Convert to USDT if desired.