Analysis of Chainflip Labs: A New Cross-Chain Trading Protocol Invested by Pantera Capital

Author: Victoria, Rhythm BlockBeats

Chainflip Labs is a decentralized, trustless protocol based on Substrate. This protocol enables automatic cross-chain swaps between different blockchains through an automated market maker (AMM) model without the need to verify user identities.

Similar to CEX, Chainflip connects chains by deploying wallets on each chain. The difference is that Chainflip's protocol coordination is achieved through a widely accepted database called State Chain, rather than a centralized database.

Users do not need to back up key files, download new browser wallets, or install any special software; they only need a network, a browser, and a target address to send tokens and provide a compatible address for trustless cross-chain swaps. At any stage of the swap, there is no need for the native token (FLIP), as network fees paid in FLIP are automatically deducted from the swap and ultimately burned through the liquidity pool.

The Chainflip Labs project has advantages such as fast swap speeds, ease of use, and strong cross-chain scalability. Its ultimate goal is to achieve automated swaps for all major blockchains, providing users with an easy-to-use, reliable, secure, and permissionless method to completely avoid custodial exchanges. They believe that attributes and metrics such as generalized cross-chain capabilities, decentralization, and product usability are crucial for achieving this goal.

It is important to note that the project's security model focuses on punishing malicious behavior, and there are still security risks due to smart contract vulnerabilities or errors, as well as support for on-chain reorganization.

Since Chainflip Labs operates in its own independent execution environment, most swap executions can be automatically performed by a network of validators without complex user interactions. In the future, the project should maximize this capability and design new features to leverage it for user benefits.

How It Works

Uniswap, Curve, and other existing liquidity pool platforms rely on Ethereum smart contracts to ensure security, allowing users to trustlessly send funds in and out of these platforms. As a cross-chain solution, Chainflip cannot rely on the security of a single smart contract to produce the expected results. Instead, Chainflip relies on a vault system that can trustlessly protect the funds of platform users. Each supported blockchain has a vault operated by validators, which are a special type of server that jointly manages cryptocurrency wallets controlled by nodes known as validators.

To create these vaults, validators participate in a setup process during which new nodes are deterministically selected as the next active vault service. These nodes collectively build a threshold signature wallet, from which transactions can only be sent when a threshold of the given validators signs the transaction. The scheme used to generate the vault does not require trusted merchants or key disclosure when signing transactions, and it is put into the network for rewards. Validators and their vaults enable Chainflip to securely and trustlessly store funds, but unlike smart contract code, it does not provide a clear set of rules on how funds should be handled within the vault.

To achieve this, Chainflip's design includes a State Chain, based on the Polkadot Substrate framework, as the coordination mechanism for Chainflip. It contains all data related to the contents of the vault and a set of rules for how transactions are handled once they enter the vault. It is through the State Chain that validators reach consensus on the status of all swaps, liquidity, and when and where transactions are sent out. By applying the rules of the State Chain and the trustless nature of the vault, users can perform trustless cross-chain asset swaps using Chainflip, thereby meeting Chainflip's three main objectives.

Chainflip does not differ significantly from its closest competitors such as ThorChain or other interoperability solution providers like Qredo. The technologies used in its design and the functionalities of the protocol may have the following subtle differences:

• Chainflip is wallet-agnostic.
• Chainflip relies on a larger number of validators (initially 150).
• Chainflip does not require the native chain to implement any complex protocols or other changes, including infrastructure.
• It uses the Ed25519 signature algorithm for its threshold signatures (excluding networks like Bitcoin, Litecoin, etc.).
• Chainflip does not rely on its network token to pair assets but instead depends on widely adopted stablecoins (USDC).
• Chainflip can be used without any additional software, dedicated wallets, pre-deposits, wrapped tokens, synthetic assets, and user collateral requirements.

Token Economics

Chainflip's network token FLIP is based on Ethereum's ERC-20 standard. The design of FLIP tokens is similar to the implementation of Ethereum EIP-1559, following an inflationary (token issuance) and deflationary (token burning) model. Therefore, the supply of FLIP tokens will not be limited (the initial token supply is $90 million FLIP), and the project may change its token model in the future.

Vault Staking and Incentives

Validator operators will stake FLIP tokens in exchange for block rewards. All nodes receive the same rewards regardless of the size of their stake. The overall security of the network depends on its collateral, which in turn depends on the yield of block rewards (APY/APR). A fundamental change in Chainflip's staking mechanism is that it does not allow delegation. The proposed validator rewards are:

• Sandstorm launch -- 5%
• Ibiza release -- 6%
• Berghain release -- 7%

Penalties

Penalties are also in place to deter malicious behavior by validators. Theoretically, if the majority of FLIP stakes are below the asset value in their respective vaults, penalties may not effectively deter malicious behavior. In practice, if the assets locked in the vault are slightly higher than the value staked by the majority of nodes (or collateral), any malicious actor would be indifferent to the decision to attack.

However, if this gap is large enough to provide an acceptable or attractive return level exceeding the stake, then validators would technically be incentivized to attack. Therefore, this metric (locked value versus collateral value in the vault, or simply the collateral rate) is an important indicator for Chainflip liquidity providers to rationalize the risks they undertake. Of course, liquidity will have an upper limit or be directly related to the network's collateral levels. In this case, the growth of the network will come from the high frequency of swaps reflected in the price of FLIP tokens.

Token Burning

The swap fees collected on the Chainflip AMM are used to purchase FLIP tokens from the USDC/FLIP pool, and the swap fees will be charged in USDC. These FLIP tokens will be automatically burned and removed from the total supply.

Liquidity Incentives

Chainflip will not guide liquidity through typical yield farming mechanisms. Instead, liquidity providers will be rewarded with FLIP dollars based on the liquidity supply fees they earn on the protocol (not just for providing liquidity) from the reward pool. This reward mechanism will eventually be reduced.

Token Functions

• Staking and running validator nodes
• Incentivizing liquidity providers

Team Introduction

Chainflip is a team of over 25 experienced professionals from Australia and Europe. The team's expertise spans software and web development, software engineering, DevOps, blockchain (smart contracts, Dapps), research and communication, and law. The team is also continuously growing, recruiting talent with varying skill levels. The company has offices in Berlin, Budapest, and Melbourne, and below are introductions to key team members.

Simon Harman

Simon Harman, as the founder and CEO of Chainflip Labs, is an advocate for data privacy and co-authored the white papers for Loki (later renamed Oxen) and Session App (which has over 1 million installs on Google Playstore). He graduated with a bachelor's degree in music from RMIT University in September 2017 and served as an Events Facilitator at Blockchain Centre for six months after graduation. Chainflip Labs is not Harman's first crypto project; he previously founded and continues to serve as a board member of Oxen, and then began focusing on Chainflip Labs in 2020, which now has around 25 employees. He currently serves as CEO of both OXEN and Chainflip Labs.

Tom Nash

CTO Tom Nash is also a co-founder and CTO of Flex Dapps. Previously, Tom briefly served as a blockchain advisor for TypeHuman and a blockchain developer for WeTrustPlatform. Tom graduated from Lancaster University with a bachelor's degree in computer software engineering.

Chris McCabe

Chris McCabe is a co-founder of the project and the COO of Oxen and Session App. He served as a blockchain educator and consultant from 2016 to 2018.

Alastair Holmes

Alastair Holmes serves as a protocol research engineer at Chainflip. He has extensive experience in software development using C++, CMake, Python, DirectX, Vulkan, VBA, and Rust. He holds a master's degree in computer science from the University of Cambridge.

Investment Institutions

Chainflip Labs raised $6 million in its first round of funding, and recently the project secured a $10 million private equity investment deal with three seasoned crypto venture capital firms: Framework Ventures, Blockchain Capital, and Pantera Capital. The total funding raised is currently $16 million. It is reported that the funds will be used to build a cross-chain DEX, with the team planning to launch the first version of the DEX product later this year.

References:

Chainflip Labs Documentation: https://docs.chainflip.io/concepts/

Whitepaper: https://Chainflip Labs.io/whitepaper.pdf

Website: https://Chainflip Labs.io/

Blog: https://blog.Chainflip Labs.io/

Twitter: https://twitter.com/Chainflip Labs

DCoreOfficial: https://platform.d-core.net/asset-review-summary-chainflip/