Chainswap is launching its liquidity bridge that will serve as a cross-chain solution for mainstream tokens. The liquidity bridge will soon be available at https://chainswap.com.
Why liquidity bridge?
There are two major categories of cross-chain assets:
- Assets that have tokens on one chain and use mint and burn solutions to cross chain. Tokens are linked through the mapped and mapping contracts and Total supply is maintained. There is no creation of a separate token with more supply.
- Assets that are mainstream and have issued separate tokens on different chains. Fundamentally the tokens are not linked, but token issuers officially give credibility to the token. Tokens like ETH, USDT are in this category.
While the ChainSwap mint and burn bridge is serving the needs for category one, we see the importance of liquidity bridge and making mainstream token crosschain live on chainswap.
How does liquidity bridge work?
The mechanism for liquidity bridge is simple to understand. Similar to Uniswap’s pair liquidity provider, the ChainSwap liquidity bridge has liquidity providers on each side of the bridge. The depth of liquidity on each chain for each asset represents the quota for cross chain on destination chain. To be a liquidity provider, you only need to stake your token on one side of the bridge (You do not need to provide liquidity on both sides of the bridge)
Cross chain without slippage
Slippage occurs when there is less liquidity on one side of the bridge, so users need to bear a cost when they use it. While some existing solutions don’t address this issue, ChainSwap liquidity bridge maintains 1:1 ratio and does not have slippage.
Anyone can be a liquidity provider on ChainSwap. The liquidity provision requires staking of the specific tokens on one side of bridge (one chain). To be a liquidity provider, you first need to decide which chain and token you want to provide liquidity for and then stake into the liquidity pool.
The liquidity provision is less complex than providing liquidity for Uniswap, since ChainSwap only requires the staking of one token type, so it is comparable to single token staking. You can choose to provide liquidity to many tokens on many chains. Liquidity providers will benefit from the bridge fees and also ChainSwap token rewards.
Since assets are actively moving across chains, it is possible that the liquidity consumption is greater on some chains than the others, so in some cases, the liquidity providers may need to withdraw liquidity through other chains that are not the chain they initially staked. It would not affect liquidity providers’ benefit or rewards.
Permissioned registration of liquidity bridge asset
Issuance of tokens on multiple chains has no linkage on the technical level, but has to be approved through official channel or human consensus. As a result, the onboarding of assets to liquidity bridge needs to be permissioned to make sure assets on each chain are real and authorized. The mint and burn bridge is open to permissionless onboarding, but not liquidity bridge.
Imbalance of liquidity bridge and arbitrage
The abandonment of slippage might bring about imbalance of liquidity on the bridge. For instance, liquidity of USDT on Binance Smart Chain might be drained faster than ETH due to high demand of USDT usage on BSC. In this case, BSC will have less liquidity to withdraw for users. To balance the liquidity on the bridge, we promote arbitrage opportunities to incentivize people to balance the bridge.
The arbitrage is simply moving asset crosschain with a timed withdraw. Arbitrageurs will bring bridge to a balance point.
In the upcoming posts, we will explain how to add liquidity, the token economics around liquidity bridge and arbitrage system for liquidity.