Roadblocks to the adoption of decentralised trading solutions have been both technical and psychologicalin nature. Decentralised order book based exchanges such as Etherdelta, 0x and IDEX have largely failed toattract large user numbers or liquidity due to the complexity associated with managing an orderbook in adecentralised manner . Additionally, they often require ‘gas’ or native tokens to interact with the DEX1(regardless of what is being traded), which greatly hinders the user experience of these applications.Most successful decentralised exchanges have relied on liquidity pools instead. In these systems, liquidityproviders contribute an equal amount of liquidity to both sides of a liquidity pool, and a smart contractthat determines the price between the two assets and presents the price-as-a-ratio. Price imbalances arecorrected by arbitrageurs, who profit from buying or selling assets at values which are divergent fromexternal markets.Uniswap’s ability to facilitate quick and convenient transfers between Ethereum tokens has demonstratedthe value of liquidity pools . However, with hundreds of mainstream blockchains, and thousands of tokens2being used daily, it is clear the Uniswap concept must be extended beyond the Ethereum ecosystem. Amore generalised method to transfer value between blockchains is needed. As a basic example, Bitcoin isrecognised for its relative stability and use as a store of value, whereas Ethereum is generally utilised forprogrammatic interaction with smart contracts and the creation of tokens. Allowing users to quickly andtrustlessly swap between currencies on different chains would represent increased flexibility and freedomin the way capital is allocated across different blockchains.However, the liquidity pool swapping concept has not yet been widely explored in a cross-chain context.Most of the recent work in this area has focused on wrapping non-Ethereum assets into synthetic tokens(also known as ‘wrapped’ tokens), allowing those tokens to be traded on Ethereum . This is not ideal, as3 4these tokens must be ‘unwrapped’ before they regain the properties of their native chain. Furthermore,each wrapped token competes for liquidity with all of the other wrapped tokens of its class, creating achallenging adoption problem.A system where tokens can be natively traded across blockchains without needing to obtain syntheticassets or specific tokens to pay ‘gas’ fees would significantly improve the situation. This is what Chainflipachieves.Chainflip accomplishes this by establishing a network of bonded nodes which can collectively view, send,and receive transactions from multiple blockchains in parallel. Using these new nodes, transactions fromany chain can be formed into liquidity pools. This allows any swap to occur between two pools, forexample, BTC can be swapped with ETH through a single transaction which executes two trades: BTC toUSDC, and then USDC to ETH. At no stage does the swapper need to have custody over any USDC, nor dothey require native Chainflip tokens (FLIP), as the network fees paid in FLIP are deducted automaticallyfrom the swap and routed through the liquidity pools, where it is ultimately burned.
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