How Chainflip is shaking up native cryptocurrency exchange

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In March 2020, Simon Harman and the team at Oxen (formerly known as LOKI) found themselves in a tight spot. It was the start of the global pandemic, and they were running out of funding, having worked to build products for three years during a bear market. To top it all off, Bitcoin’s value had just dropped to a historic low of $3,000. “We were staring down the barrel of death, basically,” Harman recalls. It was clear that to survive the team needed to develop new products—ideally, ones that operated in a different market than the privacy space. Oxen’s encrypted messaging app, Session, had just been released; that platform would ultimately gain a great deal of popularity, boasting some 700,000 monthly users. However, in early 2020, Session had not yet become profitable, and Oxen was finding the privacy space particularly difficult to operate in. They needed something new, and fast.

There was one idea that particularly interested Harman and his team. They found themselves inspired by the thought of a decentralized and chain-agnostic system that would enable native cross-chain swaps of cryptocurrency—optimally, without having to resort to wrapped tokens or specialized wallets or complex smart contracts, and with low slippage. Some products were coming to market that accomplished some of these goals, but Harman and his team envisioned a way for all these capabilities to work in one seamless package. As a result, Chainflip was established, and the development of the protocol began later that year.

The necessity for a decentralized, chain-agnostic solution is fairly obvious, Harman says. “Say I want to buy Bitcoin with $100,000. I can go and take that huge amount of money on Binance or any other centralized exchange and effectively just be able to get it at market price. However, what if I don’t want to do it on a centralized exchange? If I want to do that on-chain, currently, I can’t do that natively. I can’t just get actual Bitcoin in a Bitcoin wallet. I can maybe get some wrapped thing somewhere, but that carries a whole bunch of security risks that defeat the purpose. If I want native Bitcoin, there is currently no facility in the world to do that on-chain for anywhere less than 3% slippage—which means I’m paying 3,000 U.S. dollars to buy Bitcoin that I could buy on a centralized exchange basically at cost. So there is a huge problem there.” 

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Harman explains that there’s also a lack of efficient market structure to facilitate these currency swaps at any sort of scale. “Sure, you can maybe do a few 100 bucks, but if we’re really going to compete with centralized exchanges, and make the Web3 industry a legitimate industry—rather than some blockchains, facilitated by a bunch of companies that are currently under the pump by regulators for a variety of reasons (many of which are totally justified)—something that has to happen.” 

Harman acknowledges that Chainflip is not the only cross-chain DEX on the market. What is interesting about Chainflip, he says, is that “it uses threshold signature schemes to create wallets on all these different blockchains.” Binance, for instance, has “a lot of wallets on a lot of different blockchains”—when users want to do cross-chain swaps using Binance, they use the money sitting on those different chains to withdraw and deposit from them at will, and then do the actual trading off-chain. Harman says this is a very efficient method: “They don’t care about the underlying blockchain structure, and you don’t have to write all these crazy smart contracts. It’s all just abstracted away, which lets you do a lot of really nice things for users.” Chainflip, Harman says, builds on the same concept of having a chain-agnostic back end, but instead does the trading itself on-chain in a specialized app chain—and uses the threshold signature schemes to achieve all of this in a completely decentralized network. 

Moreover, while other products may have architectural similarities, Harman explains that Chainflip’s markets are structured completely differently. “We’re much less restrictive on liquidity and pricing. We introduced limit orders and things like this to take advantage of liquidity on centralized exchanges and other markets as well. The way the threshold signatures work and the chains we are supporting are different than anything else available.” 

Harman realizes that ultimately the clients will determine the relevance of Chainflip. “I think at the end of the day, it’s going to come down to a few things: speed, gas and pricing, all of which we expect to be able to improve on in the markets. I think Chainflip will have a very compelling positioning.”

A crypto devotee since his high school years, Harman is cognizant of the fact that products like Chainflip could not have existed at any other point in time. “There were a lot of new ideas floating around in the space that no one had really put all together yet before 2020,” he says. “For example, the FROST signing algorithm that we use is way more efficient than anything else that has come before. We knew that Bitcoin was going to make it possible to use that signing algorithm. So there were a few different developments, all arising at once—new technologies that would enable the creation of a solution like Chainflip that, until 2020, was literally impossible.”

In Harman’s view, this type of innovation is only possible by standing on the shoulders of giants. “Chainflip really is a cutting-edge technology that’s been built off the back of a lot of research and experimentation that has occurred over the past 10 years in the crypto space,” he says. “So this really is an evolution on top of other great ideas that came before.” 

Simon Harman is CEO and founder at Chainflip Labs.

This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.

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