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, Chainflip: DeFi beyond ERC20 

Chainflip: DeFi beyond ERC20 

Note: For the latest on the future of Chainflip and the next evolution of the Loki Project, read our project update.

Last week was full of excitement at Loki — we announced support for Chainflip, the latest product in our ecosystem. If you haven’t already read our initial announcement, check it out here. If you’re already up to speed on the basics of Chainflip, read on to delve into the future of DeFi beyond ERC20 tokens.

DeFi: State of the ecosystem

Up until now, most of the work in the DeFi space over the last couple of years has occurred in the Ethereum community. The convenience and reliability of the ERC20 standard has allowed the DeFi ecosystem to evolve very rapidly, in stark contrast to the slow uptake and minimal growth of previous efforts to create decentralised mechanisms for transferring, lending, and exchanging between coins. The atomic swap concept and the Lightning network are examples of long-standing solutions which, while once seen as promising, have shown themselves to be technically challenging, often offering completely impractical — sometimes even hostile — user experiences.

The blockchain world seems very caught up in the DeFi dream at the moment, but right now that dream lives and dies with the ERC20 standard. However, cryptocurrency goes far beyond these simple tokens, and many of the most promising blockchain projects of the past, present, and future are not ERC20 tokens, but instead require blockchains entirely of their own.

For the DeFi ecosystem to really evolve, there needs to be a way to quickly and easily swap between chains. Uniswap has shown that liquidity pools are one of the most convenient, secure, and expeditious ways to swap crypto-assets. Users are able to swap cryptocurrencies as they see fit, without relying on centralised exchanges, creating accounts, or using order books. This reduces some of the friction which has prevented the widespread adoption of cryptocurrency, and is particularly useful when swapping small amounts of crypto, like topping up gas or acquiring utility tokens.

Chainflip: The evolution of DeFi

While Uniswap made swapping ERC20 tokens quick and easy, Chainflip will bring this functionality to the wider blockchain ecosystem — but this means much more than just easy cross-chain swaps. By providing quick and easy cross-chain token swapping, Chainflip will power the future of utility tokens and smart contract platforms. On top of that, by providing hooks into Uniswap, Chainflip can link the ERC20 world to the rest of the ecosystem, enabling a whole new range of possibilities.

There are many platforms in the wider ecosystem which aim to provide a decentralized service paid for using their native token. One of our favourite examples is Arweave. Using Arweave’s permaweb, users can quickly and easily upload content which will be stored and hosted forever — all with a simple, inexpensive payment. A couple of dollars worth of AR is enough to permanently host a website or piece of content which can never be taken down, it’ll always be there. It’s services like Arweave which can be made much more accessible if we can remove the obstacles preventing you from acquiring and spending their native token.

That’s where Chainflip comes in. Instead of having to create an account on an exchange on which AR is traded, funding that account, and then making a trade, you’ll be able to swap it for almost anything in one simple step. Even better, if Arweave can integrate into Chainflip’s API, people could pay for content to be hosted without ever having to swap it themselves at all. Instead, they’d be able to pay for the service using any token, directly on Arweave’s website or wallet. This kind of thing is already possible in the ERC20 market, but ERC20 is a simplistic standard with some serious limitations — and the most interesting projects in this ecosystem don’t rely on it. With major smart contracting projects like Polkadot and NEAR coming in the next few months, swapping natively between chains will be more relevant than ever, not just for trading — but also for utility.

ERC20 DeFi: The issues

Wrapping tokens might be suitable if you’re only interacting with Ethereum based lending platforms and other DeFi products. However, there are plenty of other use cases where having a wrapped version of the token you want on Ethereum isn’t really useful at all. The most obvious case of this is the fact that most exchanges do not accept any form of wrapped Bitcoin as collateral for trading. Therefore, wrapping is not a good substitute for actual cross chain swapping.

Further to this, if the swapping tool itself requires the user to interact with specialised software, create an account, submit orders, deposit currency in advance, or even worse, have collateral to conduct the swap with — you’ve found a non-starter. Any swapping service which makes its users jump over one or more of these hurdles has serious limitations. This criteria precludes all of the existing DEX projects and cross chain tools currently in existence or under development, at least that we’re aware of.

If users can’t send and swap tokens from an exchange wallet, most people will have a hard time making use of the tool. It’s common for people to hold funds on exchange — this is just the reality of crypto in 2020 — so if your platform can’t accept exchange transfers, it’s going to be crippled. This is an issue that Chainflip confronts head on.

Stay tuned!

We’re still hard at work ironing out the finer technical details of Chainflip, and will commence community discussions soon. The conversation around Chainflip’s economics is also developing, but with the amount of community support we’ve received on Chainflip in the last week, it seems the community will be open to a wide variety of proposals, and we’ll be able to select the most optimal course of action for Chainflip and for Loki as a community.

For now though, we’re announcing the Chainflip discussion group for those deeply interested in talking about Chainflip and its future: t.me/blockswap

We’ll be back soon with more updates!

— The Loki Team

Note: The Blockswap project was rebranded to Chainflip on 25/09/2020.

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