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Cross-Chain DeFi Project Elk Finance Lays Out Its Vision for Blockchain Interoperability


coincodex.com 27 October 2021 19:27, UTC
Reading time: ~4 m

Key highlights:

  • Elk Finance is a DeFi project that allows users to transfer their tokens to multiple blockchains
  • In a new post, the Elk Finance explained that their project is more than just a cross-chain bridge, and is targeting multiple use-cases
  • For example, the project will be launching the CHFT stablecoin and "proxy tokens"

Elk Finance is a project that’s building a decentralized liquidity network with cross-chain capabilities. Their goal is to give users the ability to exchange tokens between blockchains, and realize the vision of multi-chain decentralized finance (DeFi). 

Cross-chain capabilities are becoming increasingly important in DeFi

Not too long ago, Ethereum was the only game in town for decentralized finance (DeFi) applications. However, the success of Ethereum has exposed its lack of scalability, which resulted in rapidly growing transaction fees. Users quickly began looking for alternatives, and blockchain platforms that offer cheaper and faster transactions have started gaining popularity – Binance Smart Chain, Solana, Polygon and Avalanche are a few examples.

Now that there’s a greater number of relevant blockchain platforms than ever before, “bridges” are becoming increasingly important. These are platforms that make it possible to transfer tokens between blockchains, typically by locking tokens in a smart contract on platform A and minting a corresponding amount of tokens on platform B. Most commonly, we’re seeing developers create bridges to connect their platforms with Ethereum.

While Elk Finance can function like one of these bridges between blockchains, its developers stress that the project’s scope is actually much broader. In a recent post, the team explained their approach to cross-chain DeFi and highlighted the numerous use cases they're targeting with the Elk Finance project and ELK token. In order to address the problems they’ve identified with current blockchain interoperability solutions, Elk Finance will be launching their own blockchain platform.

The Elk Finance team notes that the proliferation of different blockchain bridges has resulted in fragmentation, or multiple types tokens that all represent the same underlying asset. 

For example, if a user bridges their USDC from the Ethereum mainnet to another blockchain, their bridge USDC tokens will not be compatible with the bridge USDC tokens created by another bridging solution. This has a negative impact on liquidity, as these different tokens are not interchangeable with each other even though they perform the same function – provide a representation of USDC on another blockchain.

Elk Finance has also identified exit liquidity as another significant problem that’s affecting existing blockchain interoperability solutions – a sufficient amount of tokens needs to be locked up to make bridging possible. While this is not a huge problem most of the time, exit liquidity tends to become a problem right when demand for bridging is at its highest.

Elk Finance's approach to blockchain interoperability and cross-chain DeFi

Elk Finance have come up with a unique design to help realize their vision for blockchain interoperability. 

The native asset of the Elk blockchain is the ELK token, which functions as the network’s settlement currency. ElkNet is a service that connects the Elk blockchain to external blockchains (for example Binance Smart Chain and Avalanche), and the only token that’s moved through it is ELK. 

The ElkDex decentralized exchange features liquidity pools that are all bonded to ELK. This allows ssers to swap their tokens for ELK, move the ELK tokens to another blockchain, and then swap them for the crypto asset of their choice on the destination blockchain. By doing so, the problem of fragmentation (creating new tokens) is avoided. The team sums it up by noting that Elk Finance is a value transfer protocol, instead of being a token transfer protocol.

This design also elegantly addresses the previously mentioned exit liquidity problem. Here’s how the Elk Finance team explains their approach to this issue:

“ElkNet also solves the exit liquidity problem. Since ELK moves freely over the Elk network, which functions as a storehouse for ELK, exit liquidity is by definition never an issue. ELK is always be transferred in a perfect 1:1 ratio; One ELK goes in, one ELK comes out.”

The Elk Finance team is also working on the CHFT stablecoin, which will be pegged to the Swiss franc. CHFT will not be a typical fiat-backed stablecoin like Tether or USD Coin. Instead, it will be overcollateralized with different crypto assets, in a way similar to DAI. However, CHFT will also have the unique property of being mintable on any blockchain network that’s supported by Elk. 

With their “proxy token” concept, Elk Finance aims to make it easier for users to move their tokens onto any blockchain that’s supported by Elk. By supplying a small amount of ELK, users will be able to lock up tokens on their chain of origin and generate proxy tokens that can then be moved through the Elk network to any of the blockchains that it supports. These proxy tokens can then be redeemed back to the underlying asset on its native blockchain at a 1:1 ratio.

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