Blockchain technology is going through some growing pains. It is too difficult and time consuming to move crypto between various blockchains. This makes the barrier to entry for decentralized finance (DeFi) higher. Usually you find that people stay on the first platforms they bridged to and are just reluctant to keep moving to different blockchains despite there being opportunities.

Vitalik Buterin, a Co-Founder of Ethereum and crypto community figurehead, has spoken about this issue:

“We should put resources toward a proper (trustless, serverless, maximally Uniswap-like UX) ETH ← → BTC decentralized exchange. It’s embarrassing that we still can’t easily move between the two largest crypto ecosystems trustlessly.”

— Vitalik Buterin

Chainflip is one of a handful of general cross-chain solutions in development to make moving crypto between ecosystems seamless and trustless. What Chainflip is trying to accomplish is unique.

“If SolanArt allowed native ETH deposits to fund a user’s new Solana account, or if USDC could be used to buy Arweave directly to upload something to the permaweb, these developers would significantly reduce friction for their users, boosting their own protocol revenue and accelerating adoption across the board” (Chainflip Blog).

Chainflip will be the multi-chain solution we have all been waiting for. You will be able to swap your ETH directly for BTC. No more reliance on wrapped tokens. Multi-chain means being able to “support any generic decentralized transaction network” (Chainflip Litepaper).

“Currently nothing exists that facilitates low-friction cross-chain swaps as a fully decentralized protocol. Swapping tokens should be a simple process — you should be able to choose the assets to be swapped, plug in the destination address for the receiving chain, and have a deposit address generated for you. Using this address, you should be able to send funds no matter the wallet you have, and then simply receive the other asset on the other chain” (Chainflip Litepaper).

As of now we need wrapped tokens, specific wallet requirements, pre-deposits and collateral requirements for paying gas fees. Bridging assets under these conditions across blockchains is a barrier to entry that needs to be removed for mass adoption of DeFi and other blockchain services.

Layer 2 solutions and atomic swaps do not solve this problem. Any solution that requires you to store extra collateral on chain in order to conduct a swap or a centralized broker has missed the point entirely. People want to be able to liquidate their whole position in one quick step.

“Unless users are performing fewer steps overall than they would on a centralized exchange, the chances of a DEX being widely adopted are low. Users should not be expected to move their funds to a new special wallet or platform before they can interact with the system” (Chainflip Litepaper).

Basically, Chainflip is building a solution where you can get any crypto asset you want on any blockchain in one step with no unique conditions and through an easy user experience/interface.

Let’s dive further into why multi-chain is the future of blockchain products and solutions through the lens of a blockchain industry leader — Vitalik Buterin.

Vitalik recently tweeted about why he is optimistic about a multi-chain blockchain ecosystem. He shared a reddit thread for an Ethereum Foundation AMA where he explains why the future is multi-chain.

Vitalik claims that there are some fundamental security limits of crypto bridges. Here is a thought experiment to help explain the vulnerabilities of current bridging/cross-chain technology:

“Now, imagine what happens if you move 100 ETH onto a bridge on Solana to get 100 Solana-WETH, and then Ethereum gets 51% attacked. The attacker deposited a bunch of their own ETH into Solana-WETH and then reverted that transaction on the Ethereum side as soon as the Solana side confirmed it.

The Solana-WETH contract is now no longer fully backed, and perhaps your 100 Solana-WETH is now only worth 60 ETH. Even if there’s a perfect ZK-SNARK-based bridge that fully validates consensus, it’s still vulnerable to theft through 51% attacks like this” (Vitalik Reddit).

This means that it would be safer to hold Ethereum-native assets on Ethereum or Solana-native assets on Solana than vice-versa. This is what Chainflip allows for — the swapping of the native assets without special conditions which could compromise the security of the blockchain.

Chainflip deploys many wallets across many chains in which users can deposit to in order to use the platform. This is similar to how centralized exchanges work however Chainflip works through a decentralized network of nodes. The validators can create a single joint wallet for each supported blockchain through encryption schematics. This setup allows for native cross-chain swaps.

The custom State Chain developed by Chainflip, and built using Substrate, coordinates the assets being swapped and ensures proper usage. This is a Proof-of-Stake blockchain.

There are really just 5 elements which let Chainflip function. These are Vaults. Validators, State Chain, Quoters, and Liquidity Pools.

These elements are discussed on page 6 of the Litepaper:

“The Vaults are wallets that are jointly owned and operated by the Validators. To create these Vaults, Validators participate in a setup process where new nodes are deterministically chosen to serve in the next active Vault. These nodes construct a threshold signature wallet from which transactions can only be sent if a given threshold of Validators sign a transaction.”

“Validators are bonded nodes which perform an extended set of operations when compared to a typical blockchain node. These nodes compete for a limited set of Validator slots, earn rewards from the block reward, and maintain the State Chain for Chainflip. They are required to have access to (or run their own) clients for every blockchain containing supported assets.”

“Built using Substrate, the State Chain [is] a standalone blockchain which acts as Chainflip’s coordination mechanism. It contains all of the data pertaining to Vault contents, as well as the ruleset for how to deal with transactions once they enter the Chainflip Vaults, how to manage liquidity and swaps, and how the Validators come to consensus on when and where to send an outgoing transaction on another blockchain.”

“Quoters are the interface between the user and the State Chain. A Quoter’s main function is to insert Quotes into the State Chain on behalf of a user. Quotes contain swap details such as input and output addresses, and optional additional instructions such as slippage limits, return addresses, and timeout rules. Quotes are also used to telegraph the addition of liquidity to Liquidity Pools. Quoters allow users to interact with the system without any special software on their own device.”

“Liquidity Pools are simply defined as reserved portions of two Vaults. For example, a BTC/USDC Liquidity Pool would have a reserved portion in each of the Bitcoin and USDC Vaults. Each blockchain only requires one Vault, but the contents of each Vault may be split among multiple Liquidity Pools virtually. Liquidity Providers add liquidity to these pools in order to earn fees when people trade across the pool in the same way that LPs interact with Uniswap.”

All of these roles work together to ensure the proper function and security of the Chainflip network. Swaps will only take 60 sec to be confirmed on Chainflip’s network. The majority of the wait will be from the confirmation times from blockchains which you are swapping from.

The $FLIP token will be an ERC-777 token which is ERC-20 compatible. There will be a total supply of 90M $FLIP and it will be rewarded to validators and in liquidity mining programs.

Every single swap will result in the protocol buying and burning a small amount of $FLIP tokens through the $FLIP/$USDC pool. Chainflip claims that this increases the security of the protocol. As a user, you do not need $FLIP to interact with the swap. $FLIP fees are automatically processed.

Basically by holding $FLIP you are exposed to the fee revenue and long-term upside of the product.

Chainflip is aiming to create plug and play interoperability. It will be super simple for users to get the assets they want and for developers to integrate the dApp. At its root, Chainflip is really a decentralized exchange with a better mechanism for swapping crypto assets than what currently exists on the market.

There will be no more wrapping of tokens, or special requirements in general to simply swap a token. You will be able to swap crypto cross-chain in a trustless manner and it only requires an internet connection, browser and destination address.

Ultimately, the existence of Chainflip will help create a truly decentralized ecosystem without the reliance on trusted intermediaries while providing a user friendly experience that is better than centralized offerings.

The beauty in Chainflip is that it’s not just a cross-chain DEX. It is infrastructure which can be repurposed to build multi-chain solutions. Chainflip is set to become a cornerstone of DeFi.

If you interested in learning more read the latest update here.

Thanks for reading this article! If there’s anything crypto-related you think I should look into, then let me know via Twitter DM (@kyledcollins). I’m always on the lookout for good opportunities. Also, feel free to reach out if you have any questions.

Note that nothing I write is financial advice — just my perspective on what I perceive to be opportunities for investment.

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