MT Capital Research Report Chainflip, the Up-and-coming Competitor in the Native Cross-Chain Exchange Market

MT Capital Research Report Chainflip - The Rising Star in the Native Cross-Chain Exchange Market

Author: Severin, MT Capital

TL;DR

Chainflip enables native cross-chain value conversion with higher decentralization, security, and composability.

The $FLIP token will remain inflationary in the short term, as we expect the token buybacks from trading volume to be insufficient to make $FLIP deflationary.

Chainflip has better product experience and design compared to Thorchain, but Thorchain has the advantage of being a first mover, with higher market recognition and market share. Therefore, we predict that it will be difficult for Chainflip to completely replace Thorchain in the short term.

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Chainflip has a market cap of about 90M, fully diluted market cap of about 460M. Thorchain has a market cap of 2.1B, fully diluted market cap of 3B. From a comparable valuation perspective, $FLIP still has nearly 8x potential. However, Thorchain’s market cap is supported by its total trading volume of 68B and recent daily trading volume of 100M+, while Chainflip has not generated any trading volume yet.

We remain cautiously optimistic about the future trend of $FLIP, and we will pay special attention to whether the incentive plan for Chainflip’s upcoming mainnet launch can drive a significant increase in trading volume.

Chainflip: Decentralized Cross-Chain Liquidity Network

Native Cross-Chain Value Conversion

Unlike cross-chain solutions that use wrapped assets or require minting/burning assets in the middle process, Chainflip chooses to adopt native cross-chain value conversion.

This means that on every chain supported by Chainflip, there is a liquidity native asset pool, forming a universal settlement layer for cross-chain assets conversion to meet users’ needs. The advantages of native cross-chain value conversion are as follows:

Value conversion is chain-agnostic and wallet-agnostic; Chainflip supports users to perform value conversion on any chain using regular wallets.

Value conversion does not involve any wrapped assets, synthetic assets, or other assets. Users only need to submit a regular transaction for the exchange, and after the exchange is completed, users will not face any other asset risks.

Chainflip does not need to deploy or execute additional protocols on specific chains, providing higher compatibility and generality, while minimizing the user’s gas consumption by offloading computation off-chain as much as possible.

Chainflip’s native cross-chain value conversion reduces the user’s operational barriers, reduces the user’s risk exposure, and brings a better user experience.

Image source: Momentum Capital

Decentralization

Compared to other solutions, Chainflip has another advantage in its higher decentralization. Chainflip’s validation network consists of up to 150 validation nodes. The validation nodes maintain network security, participate in consensus, monitor external chain events, and collectively control system funds. The process of becoming a validation node is also permissionless, as users only need to stake enough $FLIP and win the auction to become one of them. The core of Chainflip’s philosophy is the use of MPC (Multi-Party Computation), especially TSS (Threshold Signature Scheme), to create an aggregate key held by a permissionless network of 150 validators. All operations and state changes in Chainflip require consensus confirmation from over 2/3 of the nodes, ensuring higher security. Compared to centralized exchanges for cross-chain value exchange and cross-chain bridges with high centralization, users do not need to worry about the malicious behavior risk of centralized exchanges or the malicious behavior risk of centralized servers in cross-chain bridges. By achieving higher decentralization, Chainflip avoids single-point failures and malicious behavior risks of individual nodes, significantly improving the overall security of the system.

Image Source: Momentum Capital

JIT AMM

The calculation process of inter-chain value conversion is completed by the Just In Time AMM (JIT AMM) on the state chain built by Chainflip based on Substrate. JIT AMM is built on Uni V3, but unlike a series of smart contract sets on different chains, JIT AMM only performs virtual calculations for value conversion on the state chain. In other words, Chainflip’s accounting and calculation functions are separated on the state chain, and the underlying settlement relies on the vaults set up on various chains by Chainflip. **This workflow greatly simplifies the complexity of performing inter-chain value exchange calculation, accounting, and settlement on different chains, effectively reducing users’ gas costs. Moreover, Chainflip’s state chain also supports more customized requirements for JIT AMM.** For example, Chainflip supports LPs to timely and dynamically update limit orders for incoming quote orders, preventing MEV bots from front-running trades through LP competition, improving the capital utilization efficiency of LPs, and allowing users to obtain better market prices with lower slippage.

Image Source: Momentum Capital

Composability

Compared to existing cross-chain bridges, Chainflip also offers better composability. Developers can easily integrate the native inter-chain value exchange capabilities of Chainflip into existing protocols or products through the Chainflip SDK. Just as Uniswap’s swap feature has been widely integrated into DeFi use cases, higher composability will bring more use cases to Chainflip. With the current surge of highly composable use cases represented by full-chain gaming, as the Lego blocks at the application layer continue to stack, it will inevitably stimulate the demand for underlying asset liquidity across multiple chains. However, the current situation is the increasing fragmentation of liquidity between L1 and L2, making native inter-chain value exchange, represented by Chainflip, an essential embedded feature for multi-chain projects.

Team Background

Chainflip’s team consists of 26 experienced global talents. Simon Harman is the founder and CEO of Chainflip, and he is also a board member of the Oxen Foundation. Prior to Chainflip, Simon led teams in building products such as the Session messaging application based on Signal protocol. CTO Martin has previously been the founder of Covariant Labs and the CTO and CSO of Finoa. The Chainflip team has rich backgrounds in the crypto industry, with close to 60% of the team members being developers, making up a high-quality overall team composition.

Token Economic Model

On November 23, 2023, Chainflip announced the launch of its mainnet and the issuance of the $FLIP token. After its issuance, $FLIP quickly gained market attention and currently has a price of around $5, with an increase of nearly 2.7x from the ICO price of $1.83.

$FLIP is the native ERC-20 token of Chainflip, with an initial supply of 90M, following a dynamic token supply model. Currently, Chainflip is expected to have an annual token inflation rate of 8%, which is used to incentivize validation nodes. In addition, Chainflip’s transaction fees will also be used to repurchase and burn $FLIP, potentially causing $FLIP to exhibit deflationary properties. The token utility of $FLIP primarily lies in staking for validation and capturing value within the protocol.

Image source: Momentum Capital

FLIP Staking and Validation

Similar to most validation networks, as the 150 Chainflip nodes control all funds and operations of the system, nodes must stake sufficient $FLIP as a penalty in order to participate in validation and prevent malicious behavior. The more $FLIP a node stakes, the higher the chances of becoming an authoritative validation node and receiving additional validation rewards.

Currently, it is expected that 7% of the token rewards will be evenly distributed among authoritative validation nodes on an annual basis. Backup validation nodes, on the other hand, will receive a proportional distribution of 1% annual token rewards based on their staked $FLIP. Therefore, it is evident that the amount of $FLIP staked significantly impacts the validation rewards for nodes, which amplifies the demand for holding and staking $FLIP tokens. Chainflip also anticipates that the staked $FLIP tokens will make up a percentage of 37%-66% of the total supply, as substantial token staking helps maintain price stability and reduces market selling pressure.

Image source: Momentum Capital

FLIP Value Capture

For every token exchange conducted through Chainflip, a 0.1% fee is charged. This fee is collected in the form of USDC and used to purchase $FLIP. The purchased $FLIP tokens are then directly burned. Similarly, gas fees on the state chain are used to purchase and burn $FLIP. Chainflip aims to dynamically reflect the value generated by the protocol in the price of $FLIP through its token buyback and burn mechanism, rewarding $FLIP holders and enhancing the value capture ability of $FLIP. However, due to the inherent token inflation of $FLIP, Chainflip also needs to achieve a sufficient daily trading volume to drive the increase in $FLIP price through token buyback and burn.

Future Expectations

Potential Market

As more L1 and L2 solutions emerge, the problem of fragmented liquidity between chains is becoming increasingly severe. According to DeFiLlama data, there are a total of 71 chains with TVL above 10M. The rise of Rollup as a Service and application chains will further exacerbate the problem of fragmented liquidity. Traditional cross-chain bridges, which are prone to hacking incidents, are no longer the first choice for users to solve cross-chain liquidity issues. Native inter-chain token exchange solutions, such as Thorchain and Chainflip, may become mainstream. Currently, the accumulated value on cross-chain bridges is approximately 12B, while Thorchain’s TVL is only around 300M. This indicates that there is still a market space of tens of times the size for native inter-chain token exchange solutions.

Comparing Thorchain

Overall, Chainflip’s market positioning is similar to Thorchain, but there are some differences in product experience and design:

1. Product experience: Thorchain requires a separate multi-chain wallet, while Chainflip only needs a regular on-chain wallet, making it more convenient for users. Of course, Thorchain is also working on compatibility with mainstream wallets to gradually close the wallet experience gap.

2. Decentralization: Thorchain currently has 104 nodes maintaining the security of the on-chain treasury, while Chainflip’s decentralized verification network consists of 150 nodes. In terms of node quantity, Chainflip has a relatively higher level of decentralization, but there is no significant difference between the two.

3. Product design: Thorchain’s treasury building and token exchange rely on $RUNE as an intermediary, while Chainflip does not depend on any specific token. Therefore, Chainflip’s treasury and token exchange process are not exposed to the risk of a specific token, making it relatively safer.

Image source: Momentum Capital

In summary, currently Chainflip has slightly better user experience, decentralization, and security compared to Thorchain. However, Thorchain has the advantage of being an early pioneer in the market, having brand recognition, and market share. Therefore, we predict that it will be difficult for Chainflip to completely replace Thorchain in the short term. It is more likely that, as Thorchain’s official statement suggests, Chainflip will continue to erode the market share of cross-chain bridges.

Image source: Momentum Capital

Currently, Chainflip has a market cap of around 90M and a fully diluted market cap of around 460M. Thorchain has a market cap of 2.1B and a fully diluted market cap of 3B. From a comparable valuation perspective, $FLIP still has approximately 8x upside potential. However, Thorchain’s market cap is supported by its total trading volume of 68B and recent average daily trading volume of over 100M, while Chainflip has not generated any trading volume yet. Therefore, we remain cautiously optimistic about the future trend of $FLIP and will pay special attention to whether Chainflip’s upcoming mainnet launch incentive plan can drive a significant increase in trading volume.

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