Key takeaways:
- Cross-chain DeFi project Elk Finance is developing new products and services that are designed to alleviate the core problems with today’s DeFi
- The Elk Finance team believes that the trio of problems, specifically bridge fragmentation, exit liquidity, and interchain messaging present the biggest limitations to a multi-chain future
- To overcome these limitations, Elk Finance is developing a suite of services and products designed to boost the broader DeFi ecosystem
With the rising number of blockchain platforms over recent years, bridges are becoming a core component of the rapidly growing decentralized finance (DeFi) sector. Cross-chain solutions enable users to take full advantage of the increasingly fragmented cryptocurrency space by transferring tokens between different distributed ledgers.
Elk Finance’s ElkNet service supports major blockchain networks, including Avalanche, Polygon, Fantom, Huobi ECO, xDai, and Binance Smart Chain. However, the team behind Elk Finance is looking beyond the bridge functionality and believes that their project has the potential to revolutionize the space and resolve the most glaring problems that are plaguing DeFi space today.
The current approach to blockchain interoperability has several flaws
Cross-chain solutions are without a doubt a core component of today’s DeFi – without them, blockchain fragmentation would become a much more apparent problem that would hinder the progress and development of decentralized applications. Blockchain bridges facilitate the transfer of data and tokens between various chains that would otherwise be incompatible due to different underlying protocols, governance systems, and other differentiating factors.
Many of the project’s early users see Elk solely as a bridge solution. However, the team behind Elk has recently written a blog post, in which they listed several problems with the current state of affairs in the DeFi space and described how they intend to tackle them.
The first issue the team identified was the exponential growth of blockchain bridges, which has led to considerable fragmentation. In essence, a cross-chain bridge facilitates the transfer of tokens between chains by locking tokens in a smart contract on platform A and minting a corresponding amount of tokens on platform B.
The Elk team explained how conventional bridges operate by using USD Coin as an example:
“Conventional bridges operate through a simple lock-and-release mechanism: to bridge USDC from Chain A to Chain B, a user initiates a transfer by locking USDC tokens into a smart contract on Chain A, which then tells a contract on Chain B to release the same number of USDC tokens.“
The increasing number of bridges has created a situation where numerous token all represent the same underlying digital currency, but the tokens created via different bridging methods are not interchangeable. This has negatively affected the broader liquidity in the crypto ecosystem.
In a similar vein to the problem described above, the Elk Finance team has also discussed the problem of exit liquidity and advocates that a certain amount of tokens should be locked up at all times to facilitate transfers. The team sees two possible solutions to alleviate the problem of exit liquidity:
“There are ways to minimize the exit liquidity problem, such as bootstrapping a bridge with exit liquidity furnished by the protocol or restricting the amount of tokens that can be transferred.”
The interchain messaging problem, as the team dubbed it, is another issue that has to be resolved before we can enjoy a seamless interaction between multiple blockchains. The current process of relaying information across chains is slow and inefficient and relies on solutions such as oracles, proprietary APIs that exist off-chain.
Elk Finance is working and various services and products that have a goal of mitigating the problems listed above.
Elk Finance’s ElkNet, cross-chain stablecoin CHFT, and Proxy Tokens present elegant solutions to common DeFi problems
ElkNet is different from other cross-chain solutions in the market. It allows only transactions of the ELK token exclusively, which means that ElkNed doesn’t add to the problem of blockchain fragmentation. The team explains it best: “Elk is best described as a “value transfer” protocol: it is designed to bridge value, not tokens (other than, of course, ELK).”
The multi-chain decentralized exchange ElkDex is designed in such a way that all of its liquidity pools are bonded to ELK. Traders are able to seamlessly transfer digital value between different blockchains by exchanging their tokens for the corresponding amount of ELK, sending them across chains via ElkNet, and exchanging them into their preferred tokens once ELK are successfully migrated.
In addition to alleviating the problem of diminished liquidity caused by digital asset fragmentation, ElkNet solves the exit liquidity problem as well. Since it is always transferred in an exact 1:1 ratio, it means that there is never a shortage of ELK on the Elk network.
CHFT, the world’s first cross-chain stablecoin, features a novel “gyroscopic” design, which means that CHFT will be minted natively on supported crypto networks. While most stablecoins have their price pegged to the US dollar, CHFT (as the name suggests) will have its price pegged to the Swiss Franc (CHF). The minting process will require users to stake whitelisted tokens as collateral. CHFT will be overcollateralized with different crypto assets, which all but guarantees that exit liquidity will be available at all times.
The final piece that complements Elk Finance’s broader vision for the future of DeFi are the so-called proxy tokens. Using this method, users will be able to move their tokens between Elk-supported chains with ease.
“Our proxy token concept offers a practical solution to the bridge fragmentation problem by decoupling a token from its underlying asset.”
A small allocation of ELK along with the asset that the user wants to convert into a proxy token is a requirement to create proxy tokens. Once minted, proxy tokens can be freely transferred across the Elk network to any of the supported blockchain platforms. Users can redeem the underlying (locked) digital asset back on its native blockchain at a perfect 1:1 ratio.
While Elk Finance’s rise to prominence can mostly be attributed to its bridge solution, the project has far surpassed its original core offering and is rapidly expanding its network’s functionality.
