When people refer to Elk as a bridge project, I always shudder a little. “Elk is so much more than a bridge!” I protest, “It’s an interoperable cross-chain value transfer protocol that…” At this point, as I launch into the transformative vision for the Elk blockchain, they’ve typically completed their ElkNet transfer and left the chat.
The thing is, for most of our early users, Elk is a bridge project. People tend to discover Elk after hearing about a new Ethereum challenger or a token launch on an unfamiliar chain. Once they find us, they hopefully discover what many already know, which is that our cross-chain value transfer protocol (OK, the bridge) is one of the most convenient ways to move funds from Chain A to Chain B.
In this way, Elk performs its core bridging function well, bringing crucial infrastructure to the rapidly growing realm of decentralized finance. But here’s the thing: bridges are boring. Not only that, they are some of the worst investments in the history of the world. From Ancient Rome to the San Francisco Bay, bridges have played a vital role in the progress of civilization, but, at the end of the day, all the feats of engineering and upkeep that go into them typically end up benefiting what lies on the other end.
In this article, I will briefly lay out the case for why the Elk blockchain should be seen less as a bridge and more a multi-functional DeFi gateway. I will start by explaining ElkNet in its present form and the utility of the ELK token, before moving on to two forthcoming upgrades that demonstrate Elk’s broad vision for the future of DeFi. These are:
- CHFT, a multi-chain native stablecoin
- Proxy tokens, cross-chain virtual assets
The Elk blockchain is designed to overcome the existing limitations of bridges and blockchain interoperability more generally. I’ll refer to these as:
- The Bridge Fragmentation Problem
- The Exit Liquidity Problem
- The Cross-chain Relay Problem
Let’s take a look at each one in order...
The Bridge Fragmentation Problem
As new chains and projects scramble to capture market share from existing networks, proprietary bridging solutions have given rise to dozens of individually wrapped tokens based on the same underlying asset. This in turn has resulted in widespread liquidity fragmentation, since two different wrapped tokens based on identical assets that enter a network via different bridging protocols are incompatible. This creates confusion and stunts growth by producing thin liquidity pools with artificially high price impact for traders.
The Exit Liquidity Problem
Conventional bridges operate through a simple lock-and-release mechanism: to bridge USDC from Chain A to Chain B, a user initiates the 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 on Chain B.
The fundamental problem with this model, however, is that there need to be enough tokens already locked on the destination chain (Chain B) to complete the transfer. If there are not enough tokens on the destination chain, the transfer fails, and the bridge becomes unusable.
There are ways that bridge protocols have tried to minimize the exit liquidity problem, such as bootstrapping the bridges with their own exit liquidity or restricting the amount of tokens that can be transferred. As we’ve seen, however, liquidity can still dry up during mass migration events, which tend to be exactly when they are most useful.
The Cross-chain Messaging Problem
This one is less of a problem for DeFi as it currently exists, but it is central to realizing the vision of a multi-chain future. The radical promise of programmable cryptocurrencies like ERC-20 tokens is that they carry data parcels, which transforms them into stores of data as well as value. This opens up a whole universe of potential applications that form the basis of what we now refer to as web3.
The problem, however, is that relaying information that exists on one chain to another chain is currently a slow and highly inefficient process. Current solutions are often a patchwork of systems involving subgraphs, oracles, proprietary APIs, etc. that primarily reside outside of the blockchains. Today, there is no simple solution to relay information between chains, yet such cross-chain messaging is key for creating truly interoperable blockchain applications.
The Elk blockchain provides elegant solutions to overcome each of these fundamental problems, while unlocking novel use cases that leverage ElkNet’s unique architecture.
ElkNet & The ELK Token
ELK is Elk’s native settlement currency. Unlike other bridges, ELK is the only token that moves across ElkNet, which connects the Elk blockchain to every other network Elk supports (as of this writing, Avalanche, Polygon, Fantom, Huobi ECO, xDai, and Binance Smart Chain).
All liquidity pools on our multi-chain decentralized exchange, ElkDex (app.elk.finance), are bonded to ELK. The structural advantage of this approach is that traders are able to transfer funds between chains by swapping their tokens for ELK, migrating over the bridge, and exchanging them at their destination for the token of their choosing. Cross-chain swaps automate this process, allowing users to swap arbitrary tokens, which are seamlessly exchanged for ELK under the hood.
This model has multiple advantages: since there are no wrapped bridge tokens involved, there is no liquidity fragmentation introduced. Users can of course swap their tokens for an existing bridge token, but ElkNet does not add to the problem by introducing new tokens into the existing ecosystems on each chain. This is why Elk is described as a “value transfer” protocol: it is designed to bridge value, not tokens (other than, of course, ELK).
ElkNet also solves the exit liquidity problem. Since ELK moves freely over the Elk blockchain, which functions as a storehouse for ELK, exit liquidity is by definition never an issue. ELK may always be transferred in a perfect 1:1 ratio through ElkNet.
Finally, ElkNet also offers a novel solution to the cross-chain messaging problem, since it has been designed with a messaging relaying function built into it. In the future, developers will be able to leverage ElkNet to make calls for information stored on multiple chains, transforming the landscape for cross-chain interoperability and paving the way for efficient multi-chain dApps and smart contracts. In this way, ElkNet serves as a DeFi switchboard, automatically routing calls between multiple networks on demand.
One theoretical drawback of using ELK as a medium for value transfers is that price impact (slippage) for transfers can be high if there is not sufficient liquidity to facilitate the conversion to ELK tokens during a cross-chain swaps. This is one of the tradeoffs for solving the exit liquidity problem, and it is the reason that liquidity pairs on ElkDex are always bonded to ELK. Another solution, however, is that ElkNet is able to interface across network AMMs, applying a “smart order routing” algorithm to find the most efficient trade path for the tokens on either end. Integrating DEX aggregators will ensure that price impacts are minimized.
Since ELK is not a pegged token, the price of ELK can also differ between networks, resulting in price disparities during cross-chain transfers. As many in our community have discovered, this “problem” also presents an arbitrage opportunity, resulting in instances where bridging can actually result in net profit. Of course, many traders would prefer to avoid price differences while moving between chains. This is why we are releasing a stablecoin that is designed to interact with ElkNet.
CHFT, A Multi-chain Native Stablecoin
Elk will soon launch CHFT, the first cross-chain stablecoin based on an innovative “gyroscopic” design, which allows it to be minted natively on every network that Elk supports. Like the ELK token, CHFT will carry the same token address across all chains compatible with the Ethereum VM (EVM) and unique addresses on non-EVM chains, thereby reducing fragmentation and bypassing the need for custom wrappers.
The price of CHFT will be pegged to the Swiss Franc (CHF), which is widely regarded as one the world's most stable currencies. Switzerland is also one of the friendliest jurisdictions for cryptocurrency, having recently launched SDX, a digital stock exchange that will support traditional assets alongside virtual currencies.
Users will be able to mint CHFT by using multiple whitelisted tokens as collateral. Every CHFT token will be overcollateralized, meaning that users will be required to deposit tokens whose value exceeds the value of CHFT minted based on a collateral factor assigned to the token being used as collateral. This follows the most common method for issuing stablecoins collateralized with cryptocurrency.
Once CHFT has been minted, however, users can be freely move to to any chain to any chain via ElkNet at a stable 1:1 ratio. CHFT can subsequently be redeemed for collateral locked on any chain. In the unlikely event that there is no collateral available for redemption on a specified chain, the user can simply move CHFT to another chain where there is collateral available. Since CHFT is overcollateralized, there is minimal risk of liquidations, as there is guaranteed to be exit liquidity available on one of the connected chains.
Proxy Tokens: Cross-chain Virtual Assets
While the design of ElkNet overcomes the problem of liquidity fragmentation, the very existence of bridged tokens demonstrates a broad-based desire among DeFi traders to trade, provision liquidity, and farm for yield using tokens that are currently segmented across dozens of networks. Our innovative proxy token concept offers another elegant and practical solution to the bridge fragmentation problem by decoupling the token from its underlying asset, liberating it to move freely among networks once it has been created.
In this case, users will be able to mint proxy tokens by locking their asset along with a small amount of ELK on its native chain. Unlike CHFT, proxy tokens are issued through perfect 1:1 conversion, since the proxy token’s price is tied directly to the underlying asset, for which it can be redeemed at any point. Proxy tokens offer a solution to the exit liquidity problem, since they are converted into a virtual asset (similar to a wrapped token) on their chain of origin, meaning that no locked tokens are necessary on the destination chain. Unlike a conventional wrapped token, however, proxy tokens can be moved across ElkNet onto any network, where they can be traded or used to farm with that network’s native tokens.
The possibilities of proxy tokens are endless, and doubtless the community will discover novel use cases once they are created. One clear application will be to bring popular tokens, including ones that exist on non-EVM chains, onto the networks that Elk supports.
Another exciting use case involved multi-chain dApps, where the supply for a token can exist on a single chain, and proxy tokens can be used to deploy projects on multiple chains without fragmenting supply. Elk plans to release an SDK for developers in the near future, which combined with proxy tokens will open up all sorts of possibilities for cross-chain applications. Since ElkNet serves as an on-demand messaging switchboard, the potential for novel cross-chain interoperable smart contracts and applications truly has no bounds.
Ultimately, these are just a few of the possibilities and additional use cases that the Elk blockchain unlocks. We’ve also only started to imagine all of the ways that each will be used, and we are excited to see what novel applications the community invents for them. Collectively, they demonstrate how Elk is much more than a mere bridge; it is a true DeFi gateway.
Baal is Founder of Elk.Finance. He holds a PhD in Distributed Systems.
Roland Rood is Lead Writer at Elk.Finance.
Also published on: https://medium.com/elk-finance/beyond-the-bridge-exploring-use-cases-for-the-elk-blockchain-b744cd4da8d1