Goodbye FTX, Hello Chainflip
The best cross-chain exchange experience I ever had was with Shapeshift in 2017. It was easy, non-custodial and supported all the major crypto assets — regardless of which blockchain they belonged to. After being quoted an exchange rate, I supplied a receiving address and sent crypto to a deposit address, and voila, the assets would arrive in my wallet! The problem was that this user experience was only achievable via a central coordinator, which eventually led to Shapeshift shutting it down.
Over the last five years, decentralized exchanges have made strong progress within single-blockchain ecosystems (ERC20 swaps on Uniswap, as an example). However, centralized exchanges remain the primary way people trade major assets across blockchains. Time and time again, this has led to failures of centralized actors that harm users, most recently with FTX.
The “holy grail” of exchanges — decentralized, open-source, secure, cross-chain, composable, and capital efficient — has remained elusive. Fortunately, that is about to change when Chainflip launches its mainnet.
Chainflip is a first-of-its-kind decentralized protocol that is the culmination of years of learnings on cross-chain exchange. More specifically, it is an application-specific blockchain that was designed from the ground up to facilitate a user experience similar to Shapeshift.
To achieve this, Chainflip takes inspiration from the architectures of centralized exchanges, which roughly boil down to servers with wallets on different chains that can send and receive assets. The power of this model is that it’s simple and generic; it can support any chain and transaction type, and gas fees are cheap because it only requires simple transfers.
Chainflip replaces the traditional centralized server model with a permissionless and decentralized network of validators that work collectively to create giant Threshold Signature Scheme based wallets. The network processes trades using a unique Just-In-Time AMM that uses the cross-chain confirmation delay window (e.g. the time it takes for chain A to know which txs have been confirmed on chain B) to run competitions between market makers for who gets to fill incoming orders. This is a clever approach that gives market makers time to hedge on other exchanges, allowing them to offer competitive exchange rates.
Together, these design decisions enable Chainflip to support any arbitrary digital asset type and offer an extremely simple UX, all while being decentralized and permissionless.
When Mt. Gox blew up 9 years ago, crypto wasn’t technologically mature enough to respond with a decentralized alternative, and we fell back to centralized exchanges. However, as crypto evolves, the industry improves its collective ability to solve problems and make itself more resilient. This time around, crypto is responding with a decentralized solution that offers a better experience in almost every way.
Disclosures: Blockchain Capital is an investor in several of the protocols mentioned above. The views expressed in each blog post may be the personal views of each author and do not necessarily reflect the views of Blockchain Capital and its affiliates. Neither Blockchain Capital nor the author guarantees the accuracy, adequacy or completeness of information provided in each blog post. No representation or warranty, express or implied, is made or given by or on behalf of Blockchain Capital, the author or any other person as to the accuracy and completeness or fairness of the information contained in any blog post and no responsibility or liability is accepted for any such information. Nothing contained in each blog post constitutes investment, regulatory, legal, compliance or tax or other advice nor is it to be relied on in making an investment decision. Blog posts should not be viewed as current or past recommendations or solicitations of an offer to buy or sell any securities or to adopt any investment strategy. The blog posts may contain projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and neither Blockchain Capital nor each author assumes any duty to update such statements except as required by law. To the extent that any documents, presentations or other materials produced, published or otherwise distributed by Blockchain Capital are referenced in any blog post, such materials should be read with careful attention to any disclaimers provided therein.
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