Welcome to Epicentre, the show which talks about the
technologies, project and people are driving decentralisation and
the blockchain revolution. I'm Felix.
So today I'm speaking with Simon Harman with CEO and founder of
Chain Flip. Chain Flip is a cross chain,
decentralised exchange and messaging protocol.
Welcome to Epicentre, Simon. So glad to have you here.
Likewise, Felix, thanks very much for having me.
Right. So I introduced it a little bit
like what Chaflip is already. We're going to obviously talk
about that a lot. But as it's customary on
Epicentre, we like to start a little bit with the history of
the the guest, how they found their way into crypto.
I think for you it is quite an interesting journey with like
many contributions already to like cryptography and crypto
economics in general. So, like, yeah, why don't you
tell us a little bit how you fell into the crypto rabbit
hole? Yeah, sure.
You know, crypto has been a part of my entire adult life.
I just turned 27, but I bought Bitcoin in high school in my
last year. Wow, that's coming on for a
decade now. That's crazy.
And I can't believe that. Yeah, I guess me and my best
friend were very interested in politics and economics and
things at a very young age and. For some reason, you know, also
being very into video games and such and developed a lot of
stuff around Minecraft and other games as well, a lot of websites
and things like that. That was kind of my high school
job. So I don't know, Bitcoin just
kind of spoke to us when we were young and through all the money
I was making from website development into Bitcoin for
reasons which elude me even today.
So. But you know that obviously
kicked off a a massive journey you know started university and
Etherium came out and this margin trading on poloniaks at
18 years old and you know this the crazy you know things for
young people to be doing I guess but we were kind of crazy so it
makes sense but I guess you know my journey as a crypto founder I
guess really started after university when I turned when I
was 21 and. Was very interested in the
privacy space, especially at the time.
Obviously still am. But yeah, the idea of, you know,
deploying blockchain networks to do stuff off chain, so to speak,
was always something that I thought was quite appealing and
something that people weren't really doing, especially at that
time. And so founded a project called
Loki, now called Oxen, where we spent, we have spent the last
almost six years developing. The main product that we've been
developing on top of this network is called Session to
secure messaging. App uses similar encryption to
Signal, but it's all deployed on a fully decentralized network
backed up by about 1200 independently run service notes.
They're called black validators, basically.
And we have like this shotted distributed storage system and I
think we're coming up on like 5 million downloads now, I think
about 800,000 monthly active users.
So, you know, after many years of development and a lot of
pain, now finally starting to see this get adopted in all
sorts of crazy ways, there was, you know, the Iranian protest
movement last year. That really kicked off the the
adoption of of Session and you know getting random emails from
like the Swiss government saying oh hey guys, I just wanted to
say like we're all, we're all using this and enjoying it.
So thanks, keep up the good work, which yeah, after so many
years of developing in the bear market and you know having a lot
of struggles to go through as a result is you know really
awesome to see. I'm not involved on a day-to-day
basis anymore in in that project.
Still being run by my Co founders Chris Key and Josh down
in Melbourne, Australia, but a couple years ago I moved here to
Berlin to take on chain Flip. And you know, it's another good
example of a project which although is, you know, heavily
dependent on blockchain technology, you know, we're
doing a lot of stuff off chain, so to speak, to create a product
that so far has eluded the space for many, many years, you know,
ever since Ethereum became a thing.
And alternative block chains as well like even like wired stuff.
I remember these sorts of conversations happenings like
for you know for a space that's so oriented around
permissionless money. You know why are we using all
these exchanges to do all the value transfer within the space
And you know what what potential other solutions are out there.
You know Bitcoin, your theory and swaps is kind of you know, I
consider it to be the Holy Grail of of the space and.
Although there has been some good progress in the last couple
years, you know a lot of the time it's been some weird
wrapped token thing where you know you have this fragmented
liquidity and this bridging risk and stuff and pretty low
adoption. So yeah, I guess that's sort of
a hopefully a pretty succinct summary of how we got here and
what links it all. But yeah, as you say, it's been.
An incredible journey from start to boss office, not over yet,
far from it. But yeah, the cryptography side
of things has always been very interesting, particularly in the
privacy space. I was really really good
introduction into that, diving straight into the deep end,
building off the back of Manero based blockchain which has some
pretty crazy stuff in it. And now you know this sort of
core of this protocol relies on threshold signature schemes, In
particular a scheme called Frost, which is a.
Signature based system which allows us to create essentially
wallets on a bunch of different block chains and it's all
controlled by the validating network which we've capped at
150 could go higher but 150 validators, signing
transactions, doing key Gen., rotating the keys, rotating
funds through these vaults we call them and that allows us to
achieve a kind of architecture that.
The centralized exchange is kind of figured out by default.
I guess you have several block, several block chains out there.
You just create a wallet on each of those and then you sort of do
the accounting and the swapping and the trading separately from
that. So you settle using this
threshold signature scheme. But then you do all of the the
accounting separately and what they would call a matching
engine. In our case it takes the form of
something called the JOTAMM, which I guess we'll talk about
later probably, but. Yeah.
I don't know. Is that a good summary?
I'm. I'm on the right chat.
Yeah, very happy. You already delve into some
topics that we want to like go into some more I guess.
So you've been working on this since since around when you said
like quite a big ride like Che Flips been in?
We we started doing research into the topic at the start of
2020. I mean fair context, you know at
at the time oxen was. You know, doing OK, but Bitcoin
just dipped to $3000 at the beginning of the pandemic.
And you know, we were kind of concerned that we weren't really
going to be able to continue with the level of resources that
we'd had. We've been building throughout
the bear market on what we'd raised very early 2018.
But you know, at at that time, for those that were around,
you'd probably remember. How dire things seemed at at
that moment in time. So we were keen to expand what
we were doing and try and find an angle that could sustain
everything and luckily that wasn't necessary in the end, but
it did give rise to this idea of chain flip.
So yeah, we started researching. I think the first version of the
white paper for this came out in July of 2020, which was right
around the same time that Uni swap and the whole yield farming
thing in the D Fire summer. Kicked off.
So we were looking into this even before then, right.
Yeah, I think that's that's actually very interesting
because now I guess that was actually before all the like
cross chain stuff really happened with all that ones.
And you know like I guess the concepts from Ethereum being
ported over to like other chains and then then like sort of these
systems interacting and how we do, we do have a bunch of of
bridges around, right. But I guess you know like your
network sort of expands on that and gets rid of some of the
problems that some of these early bridges have.
Maybe we can like yeah start there again.
I think you you already mentioned you you have this
threshold signature scheme. Can you talk a little bit about
how how it works and like what are the benefits over, you know,
maybe some alternatives of of bridges that are being deployed
right now, you know what's what's the, what's the core
issue that that dissolves? Yeah, sure.
I guess like. As a fundamental principle, we
came into this thinking about the entire vertical of native
cross chain swaps. You know what what what is the
user experience that we're targeting here.
And and you know that sort of informed all of the decisions
that we made in the protocol design and all of the updates
that we've made to it along the way as well.
But as you point out, you know there's been various forms of
bridges and and wrap tokens and things around for years now.
None of which have really proven to be, you know, 100% dominant
in any particular vertical. So you know, we've had a lot of
hacks because a lot of these were just pumped out by, you
know, random teams who either ran off with the money or built
them in a rush and you know, didn't do the necessary due
diligence. And I think to an extent that's
still very much happening today, although you know.
There has, there has been some consolidation thankfully, but
you know, wrapping a token in one place and and having it
being available and another is fine.
But the liquidity available on these alternative chains can be
very limited. You accept a lot of tail risk as
well and you know I don't think I need to explain how much
money's been lost doing this. It's extraordinary.
I think the closest equivalent protocol that you might compare
to Chain Flip, there's probably 2 that I would point out.
One would be Thor Chain who definitely paved the way for
this technology of of having this threshold signature scheme
based settlement system and then layering a trading system on top
of that. You know it's conceptually the
most similar to Chain Flip, although.
There are differences at every level between the two.
We don't share any any code or anything like that, but
conceptually that's pretty close.
And then the other one that I'd point out is probably Axola,
which allows you to breach U.S. dollars from one chain to
another. That's pretty much the only use
case for it at the moment and for cross chain messaging in
general. We haven't seen really anything
else pop up that people seem to be using in terms of the
interoperability category, which is a.
Word people love to throw around, but then in practice
falls short. Very often they too have a
decentralized validated network. They're sort of doing this, you
know, minting, burning Oracle thing.
They have Axel USD as a sort of middle step that allows the
minting and burning of USD balances from one place to
another. And then from there you can use
that to swap in and out of various assets through, you
know, the usual suspects you need, swap pancakes, swap so on
and so on. So you know there are now
solutions out there that are miles ahead of you know the more
traditional bridging technologies.
But still, there is definitely room for improvement in in
especially within the native swaps vertical itself, like for
example Bitcoin. You know you can do Bitcoin
swaps natively now through four chain, which is great.
The only downside is, you know, due to the market structure, you
do have to wait quite a long time for those to be processed.
You know, depending on the size of the swap, it can take hours
or sometimes even days depending on what you're trying to do.
And there's definitely improvements that can be made
there. And then anything outside the
EVM ecosystem is a bit of a black box.
You know, you have, you know, ICB within the Cosmos ecosystem
beginning in and out of. There's been a challenge until
recently. Bitcoin woefully undersupported.
It is a dinosaur protocol. I hate to say it, but you know,
working with a directly, you can clearly see how far we've come
from that original design and then the number of workarounds
you have to develop in order to be able to work with it in
something like this is not fun, but it is what it is.
Polka dot solana, you know, the list goes on.
File coin, you know, Telegram over network.
There's there's many, many examples of these sort of non
EVM or non less compatible EVM. It's not, it's not a one or the
other thing you know there really is a spectrum going on
here. But with such a diverse range of
blockchains out there and you know the size of some of the
assets in terms of the volume and the liquidity and and such
that you see in the centralized exchanges compared to the level
of support it has within D5 and within decentralized exchanges
generally. Is quite surprising and has
remained so ever since we started and long before that as
well. So yeah, I guess we can probably
dive a little bit into the architecture and talk more
rigorously about some of the components that enable this.
But I guess our end goal is that, you know, with one
transfer you can send funds from any wallet to any wallet and
receive the asset that you're looking for at.
Essentially A0 slippage price with you know a very minimal
bridging time as well. We've got some unannounced
features coming up around that which we're excited about.
I can't really talk too much about that, but you know the, I
guess the idea, the core idea is to repeat what Uniswap did for
Ethereum based assets. You know, before D5 Summer you
know all of the ERC 20 tokens were still pretty much
exclusively traded on centralised exchanges.
But you know this year even now even in this you know pretty
pretty bad market Eunice Wass been crashing Coinbase in terms
of volume. You know there's the, the
Etherium ecosystem has really stepped up and above beyond the
centralized exchanges in terms of convenience and speed and all
of that kind of stuff. As long as you can get that
pricing and that liquidity aspect right and you know make
it fairly straightforward, we believe we can also repeat a
similar. Level of adoption for assets
that are outside of the EVM ecosystem.
So, yeah, yeah, I think that the core here being sort of this
combination almost like native of the swap and the bridging and
like kind of thinking from that user perspective which which I
think will probably helps a lot like actually achieve that too.
And so that's also why I want to dive into, you also mentioned
already the first white paper was like kind of when UNISWAP
came out. Now the way I understand you
have this just in time liquidity protocol, right that's that's
sort of similar to to UNISWAP V3.
But I guess initially when you when you started Checkflip
UNISWAP V3 wasn't wasn't even the thing yet.
Did you already like sort of think in similar direction about
how like the liquidity provisioning should work or did
you later adopt the UNISWAP V3 kind of model?
And and maybe also like in general how how is do we have to
think about like chain flips, like decks, kind of as UNISWAP
V3 like native cross chain features or are there like other
differences? There are other differences.
I would probably most closely related to Uniswap XS proposed
intense feature which isn't even out yet.
Rather than UNISWAP V3, yeah, but you're right at the
beginning, you know UNISWAP V2 was out and you know it was it
it it'd been running for a couple of years, but it didn't
really have the liquidity necessary to, you know, have it
be widely adopted. But then D5 summer game and that
changed the game. Then UNISWAP V3 came out and
then after that we decided you know, rather than just do V3
which would have was an improvement.
But in this particular context, we thought we could go further
and so we developed this thing called the JITAMM.
So we were seeing with UNISWAP V3 this new type of MEV attack.
Quote UN quote, it's not really an attack because you know the
user wins, which is always nice, but essentially if you had a big
enough swap coming in on UNISWAP V3.
You could submit a Flashbots bundle where you could
essentially create an incredibly tight liquidity position around
the the market price of the asset.
So say it's like $1,000,000 swap, right.
You could set up a Flashbots bundle where you add a bunch of
liquidity at whatever price you like, basically whatever you can
get on finance and the prime brokers, OTC desk, everything
else. So you know you're basically
sourcing liquidity externally. Deploying that liquidity, then
you execute the swap and then you remove that liquidity.
So what you've essentially done is you've just front run all of
the other LP's and given the user a better price to win the
liquidity fee. And so that became very popular
very quickly for larger swaps. But because of the gas costs
involved, because of the bribery that you have to do to execute
that, you know the size of the swap has to be massive for that
to make sense. We realised, well you know, in
our context, because this is like a bridge and an Oracle and
an AMM all in one, because of the the delay in bridging,
everyone can know what swaps are coming.
So if you send one Bitcoin to be swapped into Chain Flip, you
know there it will take an hour for that deposit to confirm when
we're going to We'll. That won't be the case soon, but
we will ignore that for now. You don't need an hour to to do
this. You'd need, you know, a minute
at the top. You don't even need a minute for
the active LP's. You know, this is all done
automatically, programmatically, but because you know it's
coming, you can essentially go, OK, well, you know, I'm willing
to offer X price on on Bitcoin, save 25K and there's another
liquidity provider who is also doing the same thing.
And then, well, I'm going to offer 25K and $2.00, you know
I'm going to beat. I'm going to beat you so.
You have this system where liquidity providers can submit
maker only limit orders on top of the the standard uni V3
pools. If you want to provide passive
liquidity you can and you know the the execution will move
through that liquidity where it can.
But these limit orders on top really supercharge the the
marketplace because it means that rather than depending on.
What is usually quite an inefficient pool structure, you
can have liquidity providers quoting in real time based on
global index liquidity. So effectively it means you get
0 slippage swaps. You wouldn't be able to get a
better price on any particular centralized exchange because
they that doesn't aggregate all the order books.
So at least it's a market order. So you know that's that's a
really cool feature and it's all nicely mathematically
integrated. We've we've forked Uni swap V3,
converted it into Python then ran some experiments and then
once we were happy with the design we then converted it into
Rust and deployed it in the in the state chain within the chain
flip ecosystem. So yeah you kind of have LP's
front running each other to offer you the best price.
It's kind of like an open OTC market for native cross chain
swaps which is pretty unique. I don't know of anyone else
doing it this particular way. COW swap kind of has a similar
thing going on, but again that's only single chain swaps and uni
swap. X intents will also have a
similar thing, but again single chain kind of auctions for
incoming flow. So yeah, hopefully that means
for users, you know, you can swap 200K worth of Bitcoin and
get the same if not better price than you would on Binance.
But it's all done completely decentralized.
You don't even, there's no accounts, you don't even sign up
for anything. There's no withdrawal delay or
anything like that. As soon as the swap is done,
that's it. Your tail risk is over, which
is, yeah, I think hopefully going to be very appealing to to
people. Yeah, super interesting.
Like I think I read somewhere in in your dogs that's this sort of
liquidity provision that just in time liquidity versus like as
reasoning has. Sort of been like 3% of the
volume in in 2022. Do you know if that number
actually went up in the meantime and and maybe I guess you
already sort of mentioned, is that mostly because so it's it's
like relatively low I guess still is that because of the the
cost on Ethereum like the gas fees and and sort of just not
enough people doing it and and or where do you expect it to go?
Do you think this will like go to 100% at some point or like?
Much larger like maybe, yeah. Well I think with UNISWAP X like
the intense infrastructure that they're building now does
exactly this. It allows, it creates a bit of
time and a bit of space and this sort of off chain system whereby
you know, market makers, liquidity providers, whatever
you want to call them can put forward a bid for incoming flow.
So this is not a radical idea, right.
This is this is something pretty widely understood in even in the
traditional finance world. The V3 AMM or just AM Ms. in
general are the strange thing that's occurring in the
industry, right That this is that's been the deviation from
the norm. But yeah, the reason why it's
not like 100% is because when you're doing a $50 swap, you
know to submit a Flash bots bundle in the 1st place to be
able to execute this kind of action costs.
I I don't actually know off the top of my head, but you know
it's it's significant, it's hundreds of dollars potentially
and you know you have to be able to clear enough in profit to
make that worthwhile. So the size of the swap has got
to be, you know, several $100,000 before it even makes
sense to even think about doing this kind of just in time
liquidity provision on Uni swap V3 again because of the gas
costs. But on chain flip, because we're
running in this app chain environment, the cost is
essentially 0. So you can, you can bid for this
flow with no downside risk and you know locally source in real
time from whatever market making software you happen to be
running. So for users, this is really
good because it means that even if I am doing a $50 swap, I'm
still going to get, you know, access to those same sort of
rates, which is exciting. Right, and and so just.
To clarify, I guess the, the liquidity providers or the
market makers or whatever we want to call them, they interact
with the chain, flip chain, state chain to like submit their
orders and how. How does that work in practice?
Like some API or yeah, it's called the LPAPI, very creative,
I know, but it's essentially just a blockchain client really.
And you can subscribe to it and you know you connect an account
to it. So you have some local keys, so
you you deposit funds into your LP account, so you send some
Bitcoin, you send some Etherium, you send some U.S. dollars,
whatever we used to say rather to the chamber protocol through
deposit channels, and then you have a free balance inside your
LP account. So really it's pretty much like
a centralized exchange in many ways, many of the same exact
same API calls. It's just you're dealing with it
through this wrapper that talks to a blockchain rather than
through an API that talks to some matching engine somewhere
on someone's server, right. So yeah, it's you can think of
it like an exchange account, you know, if I want to provide the
quiddity, I, you know, send some money into the exchange and then
I can, you know, place orders against any particular pair,
then they'll the trades will take place and then I can settle
that later and and withdraw any of the assets that I have there.
So the LPAPI has many of the same things, you know, like
place order, cancel order, modify order, that sort of
thing, range orders as well as limit orders.
You know, deposit, withdraw, you know all the same sort of API
calls that you would make as a normal LP are available to you
as well as you know lots of data feeds like you know you can
also. The unique thing though is that
you you can subscribe to a list of incoming swaps, so you know
it'll actually pull information off the stage and to say OK,
there is a Bitcoin swap coming in this block which is estimated
to be around this sort of time at this size so that you know.
And then you can essentially automatically trigger a bid
against that using, you know whatever market making software
you happen to be using. So API basically in a Rust
ridden wrapper, which is fun. Right.
Yeah, that's awesome. And I think, I guess one.
Sort of complication I guess in this approach at least like from
what I understood is that you don't really know in advance as
the user how much slippage you're actually going to
experience in the end of your price.
Can you talk a little bit about again why that is I guess and
how you're like sort of dealing with that or how how should, how
does the user interaction look, is it like?
Basically like you give it some range of a price that can be
expected or or. How do you treat that for a
user? Yeah, I mean, it's a, it's a
good question, right? Like you can't just read the
state of a pool and then, you know, pull a price from it, but
you can. These exact same thing is true
for you to swap, you know, by the time your swap is included
in a block and all of these transactions.
So adding, removing the query, the other swaps have taken place
before yours gets executed. The state of the pool has
changed the prices that people quote or not people but these
front ends quote that you see across defy actually have no
bearing on the final price you get.
And they don't factor in things like MEV and you know price risk
over a period of time or or whatever the case may be.
You know there there is no such thing as a guaranteed price with
on chain trades. It's just a reality.
Unless you place strict slippage limits, which people don't do
because they want their swap to go through.
So they set a 0.5% slippage limit or something like that,
and then you are you're essentially at risk of losing up
to 0.5% of the money. But people don't seem to care
about that as long as there is some sort of slippage limit.
Which is why, although I don't think this is really going to
make any practical difference in 99.9% of cases we are actually
adding a feature now called fill or kill which allows you to set
a minimum price that. So we'll sit.
We'll actually simulate the swap on the chain at the moment of
execution so that we can make sure that if we are going to do
a swap for you that it is at a certain minimum price that
you're willing to accept. If not, we will revert it and
send it back to wherever it came from.
It does require a little bit more effort on the user side and
we can't do it in all cases, particularly where it's like a
we'll get into the cross chain messaging and things like that.
But if if it's one hop along a string of swaps that's coming to
or going coming from or going to some other bridge, some of the
chains, some of the, some of the decks, it's very composable in
that way. But if it is one step in a long
string of steps, you know we can't always guarantee that we
can go backwards, right? We can't always send back the
money because we don't necessarily know where it came
from. We have an address, but it might
be Binance or it might be a smart contract that you don't
have control over or something like that.
So you know, there's a lot of edge cases that we have to
handle here, which is why we didn't set slippage limits
originally because that means you have to provide a refund
address and you have to provide an origin asset and things might
get stuck. So we didn't do that, but we are
adding that as a feature so end users can have the confidence
that they send money into this thing.
They are going to get a minimum price if they're willing to do
the configuration step. Right.
You mentioned there like it can go through some other bridges.
Do you mean like are you also aggregating like other bridges
or meaning like other like because everything is sort of
within the cross chain chain flip protocol is all like
bridging happening within that sort of validator set or you
also like using No, no, I mean I mean like what you like.
Reality is when we launch, we're going to support like 5 pairs
and people want to swap more than just five different assets,
right. So as an integral part of our
product where we partnered with Squid it came out of exile
originally but that so chamber will be included in in in a
route. But you know if I if I'm
swapping from I don't know name, name, name something on Uniswap
die, right. We don't support die but UNISWAP
does right? So we can like we can configure
the entire route such that if we do a dice swap, then we ingress
the USDC, then we swap it to Bitcoin, right?
But we don't, we don't control uni swap, we can't revert back
and we're not going to send it just back to uni swap.
So yeah, we expect that the majority of routes that we are
involved in are not chain flip end to end, right?
There'll be some, well, unless it's like USDBTC, which actually
could be the majority of the, I don't know.
But there'll be a lot of cases where you know it either starts
on some axle supported chain that we don't support or it
starts or ends in a decks that are not us, right.
So we don't have full control over the whole route and as such
we have to build in all these different things to handle
different edge cases depending on the situation.
So it is quite complex. Luckily for you as a user, this
is all abstracted away and you don't have to think about this
at all. We've done the hard work for
you. Great.
So so you mentioned like it's 5 pairs.
I guess, can you tell us like which which ones it are?
It feels like BTC use this one, right?
And then is the plan to basically expand that and I
guess for more, is that like a permission less process of how
pairs are added in that can't be permissionless, unfortunately,
just on the basis that if we're going to support a new chain,
all of the validators have to connect to some node on, you
know that whatever that chain happens to be and also adding
new pairs, everything is denominated in USD, which right
now is only collateralized in USDC, although as an end user
you don't have to care about that.
Again, we'll swap it to or from whatever you want, but all the
LP positions are collateralized in USDC to start with.
So yeah, that that. That's for liquidity reasons
though by constraining the possibilities we make it much
much more efficient, right? If by having only BTCUSD and
then ETH USD it means that we we we've seen this play out in uni
swap so much like the only pairs that are really there now are
all backed in USD in some way. Because it just means no matter
where you start and where you end up, you're combining all of
the liquidity for each of those assets in such a way where the
in price always is always better.
So having a direct ETH BTC pair would just detract liquidity
from all users. So yeah, this fragmented
liquidity piece is a is a big problem and permissionless pools
are part of the problem. You know, there are some assets
which have like, you know, 6 or 7 copies of exactly the same
market structure where it's just not necessary, right?
I don't know how many ETH USD pools there are out there in the
world, but there are too many, I can tell you that.
And it makes things worse for users because what capital is
out there is split across more pairs than is necessary.
So yeah. Right.
And I guess. These sort of like wrapped
assets don't help much there either, because they make things
infinitely worse, yeah. Right, OK, yeah, that that makes
no sense. And then, so yeah, let's dive
back a bit into the whole like validator thing where I guess we
mentioned the threshold signature scheme.
But yeah, maybe you can expand how what do the validators on
chain flip do exactly And maybe also like you know how you know
our new chains edit. In in this world, well what do
the validators do? They do everything.
It's it's AI guess you'd say it's an Oracle bridge decks,
it's not really an L1 but there is a blockchain that they also
validate decentralized custody thing all rolled into one.
So everything that I say that chain flip does the validators
do it. So witnessing incoming deposits,
so someone wants to make a swap, they create a deposit channel,
the validators organise that, the that they then make that
deposit and then and then it appears on the Etherium
blockchain or whatever. The validators observe that and
then they have this consensus system where they agree that
this has taken place. So kind of like an Oracle and
then that triggers a follow on action which is usually a swap
which is then executed in the following block and we have
specific execution rules. So it's not a, it's not an L1.
You can't do whatever you want on this chain.
There are you can own at swaps are only triggered through
deposits, so you know you can't sit there and submit a swap
transaction. This is all automatically
executed by the validator network.
So this app chain environment that we've built is works quite
differently to what people are used to.
None. There's very few agent initiated
actions. So on uni swap to do a swap you
actually do the swap, you pay for the execution then do you
you actually do the smart contract interaction, that's
what you're signing and then you know whether or not it follows
the rules this house determine in this case the validators
doing that execution automatically which is very cool
because it means we can automate a lot of stuff.
We can add a lot more bespoke rules around it, but it's all
part of the consensus driven process.
And then once you end up with the asset on the other side,
then the validators are going OK, we now need to send this
money somewhere so they'll agree on what the transaction looks
like. So how much gas we're going to
pay, where it's going to be sent to, how much we're sending, all
this kind of stuff. And then they'll get together
and they'll do a threshold signing ceremony.
So they'll use this massive Schnorr signature scheme, 100 of
them at any time, 100 of 150 is the threshold, and then they'll
do a joint signing ceremony. It's the largest decentralized
custody network system, I think in crypto.
I could be wrong, but I can't find any other examples of this,
especially at this scale. And that's pretty cool because
then, you know you have now produced a valid Bitcoin
transaction or a valid Ethereum transaction, which one of the
validators is they're nominated to broadcast.
If that fails, everyone has a copy of it, so they can deploy
it again, and so on and so on and so on.
So they're doing everything. They're doing everything that a
centralized exchange does, all in one and all together.
You know, this is consensus driven, which is why it's taken
us three years to develop. Because the the number of edge
cases that you have to deal with and even even simple things for
seemingly simple things like tracking gas and determining,
you know what the price is, you know, there's no human on the
other end that can go shit that was too low.
I'm going to have to like you know, boost it now like that.
That's not a thing. We can't really.
I mean we could do that, but this all has to be done
completely automatically all through a blockchain.
So you know it. It really is like pretty cutting
edge stuff and we're not the only ones that have pulled it
off. You know, Axel R has done parts
of this, store chains done a lot of this as well.
But yeah, it is, yeah, difficult to say the least.
But you know, we've been running test stats now for over 2 years.
And you, you. Mentioned like a hundreds of
150. That's that's because of like
consensus. Thresholds like 2/3 need to sign
off on something exactly. So there's no point doing 150 of
150 because you only need 100, right?
So to make it scalable, yeah you you pick the minimum size, you
randomly select from the group and then if that fails you retry
with the second group within the 150 set.
And that means like each of the validators needs to have like
the same amount of stake or the same say I guess in a network.
Is that correct? Yeah.
And I guess we'll talk about the auction soon and how that works.
But yeah, essentially, you could describe it as proof of
authority, but it's not really. There's a sort of bond level
that everyone's bonded to in any given epoch, But yeah, exactly
right. They they have an equal share,
they have an equal weight, I guess just because of the nature
of the threshold signature schemes.
Right. So so yeah, let's, let's start
actually with the auction. So you right, like again, we
have 150 validators, they run all the networks actually that's
maybe also the question, is it like?
All the validators have to run all the networks or can
validators choose which ones? Yeah, they they've all got to
have, they've all got to have the same endpoint connections.
I mean we could we could Shard this out in some ways, there are
ways we could re architect it, but you know, for now, you know,
Axel is able to have all their validators run 20 endpoints.
So it doesn't really seem to be a huge limiting factor.
So yeah, in order to be a validator, you need to have an
endpoint available for all of these different chains.
Often times the best way to do that is to run your own node.
But there are some networks where that's just completely
impractical. Like running a Solana validator
for example, is yeah, very, very expensive.
So yeah, we leave it up to the providers, you know, thought
chain. We're pretty big on forcing
everyone to have their own light client or something of that
nature. But that didn't really work.
So then everyone ended at home to run a full node.
But that's very expensive and very cumbersome and very
painful. So then you know.
Of course, validator operators, being validator operas,
developed workarounds and then just ended up using, you know,
inferior or whatever for the the equivalent thereof.
Which is fine, you know, as long as there's diversity.
It's it's really down. At the end of the day, the
validator operators themselves are on the hook if, if they if
they end up using a malicious endpoint, you know, they're
probably they're going to be in the minority and as a result
they're going to get penalized for that if it fails.
So yeah. Right.
And I guess you know a bunch of the.
Validators, depending on what sort of entities they are,
probably already may be running or Solana Validator and might be
able to use that architecture exactly exactly right, yeah.
OK. So again I guess the the
difference here wait with this wait from people that maybe know
like proof stake in other ways is like there's generally maybe
like delegation and like different stake amounts.
Now you guys have a bit of a different system because of I
guess the limitations or the TSS what what that requires.
And that's this auction, right? You need, you need to
essentially have or can you explain actually how how are are
the 150 validators that end up running the stuff chosen and
like, you know, yeah, I guess the entire system, that's Vanda.
Yeah. So this was a real challenge to
come up with crypto economically.
How? Like, there's some very specific
constraints in place in this system that mean that, you know,
it's just not going to work like other networks.
There is a finite number of authorities or validators that
can hold the keys because of scalability constraints.
You can't wait those different shares either.
They're all worth the same thing.
So the question is, you know, how do you, how do you make sure
that the stake is distributed as evenly as possible across the
set. And what we developed in
response to that is a system called simultaneous single round
open Dutch auctions, which is a horrendous mouthful.
But basically the idea is we have a rolling auction and the
start it's going to be every day, every 24 hours, but just
we're going to reduce that every 72 hours.
And essentially what happens is the top 150 bidding validators
are then selected and the lowest value, the lowest staked value
of that becomes the bond or the minimum active bid is sometimes,
we sometimes refer to it. So everyone is is committed to
the same level of stake every auction and it's all determined
based on the lowest bidder. So even the the stake, the
required stake is evenly spread, anything on top of that can be
withdrawn and that's so we can enable, you know, dynamic
rebalancing. So if I'm a validator operating,
let's say I have 3 validators and the minimum stake is like
100,000 flip, let's say all the bond ends up being 100,000 flip
through this round of auctions. But you know, two of my
validators have like 150,000 and one of them has 100,000.
I can now, you know, split off that excess stake, take, take
that off the top and deploy it into a new validator, thereby
increasing the amount of validators I have to four.
And you know, now I have 400,000 flip stakes where I'm earning
more rewards. So it's trying to encourage this
natural redistribution across auction cycles and it's trying
to make sure that the level of stakes provided within each
validator is equal. So as the dynamics shift, you
know this will change to. There are also rewards for
backup validators for those that are not successful in the
auction just to keep them around and there's a whole thing around
that. But I think this is a really
exciting component of of the protocol actually and
particularly around the the flip staking dynamics as well.
We also have a liquid staking product that's been developed on
top by a company called Thunderhead St.
Flip. So you know if you're not a
validator operator directly, you know you you can you can just go
to them and they'll do this rebalancing for you across their
providers. So you know from an end user
perspective for a flip holders perspective this may not be that
crazy relevant but you know we've had to develop it in this
particular way in order to yeah, overcome some of the
requirements that arise as a result of having this
decentralized custody system with this equal weighted shares
across each of the validators. Like you know the people ask me
sometimes like oh why aren't you a para chain, you know you're
you, you have the substrate thing like why?
Well like yeah we could be a para chain but then we'd be
paying for security. That doesn't really help us
because you know securing our block chain and securing the the
extrinsics in that a one thing. But these guys are holding key
shares to vault with millions of dollars in them that you know
are not held on on our block chain.
They're actually held externally.
So yeah, adding a dish like that's the most vulnerable part
economically of the system. And so everything has to be
oriented around that. But I think the auction dynamics
be quite exciting because the stake will probably start out
low, like they won't probably won't be 150 bidding validators
in the first rounds of auctions. So it'll be really easy to get
in and like earn rewards and stuff, but then it'll like
slowly scale up as more rounds are conducted.
So I'm really excited to see that play out, with the main net
launch coming up very soon. Right.
Yeah. Yeah, it's on super interesting
like novel sort of mechanism, I think.
Yeah. What I'm wondering, I think
there's a similar thing a little bit on Sweet that I'm aware of
where the validator sort of bid on the minimum gas price for the
epoch. Which also like kind of means
the validator has to like do this extra step that they
generally maybe don't do like in in on top of like just running
the software and and validating transactions like actually
actively. Sort of submitting some sort of
mid for something that is I guess in the SUI case for the
gas based on their hardware cost which is also already like you
know how do you actually measure that?
I feel like the space maybe not at that point yet, but can you
maybe explain in the chain flip case how like what are the like
parameters that the validators take to kind of make a bit or
like how much, how do they determine how much stake they
they should bid? Is that based on like?
The competition or the expected rewards that come from flip
staking? Or, you know, how do you
actually set this value? As a as a validator, yeah, I
mean it's it's it's purely down to market dynamics.
So it's purely down to the appetite of other validator
operators, right. So if there's, you know, 150
validators but they're all only staking 1000 flip, then they
have no reason to stake more than 1000 flip.
But because of the rewards, you know, there's obviously an
economic equation that comes into this which is OK, you know,
at if I stake 1000 flip, my APY is going to be like 1000%.
And so you can imagine that you know, a lot of people are going
to then go like, well, I'll be crazy not to stake.
So you know you have this market dynamics system whereby at some
point there'll be some equilibrium that's reached where
the level of reward is reaches the level of essentially the
level of stake. So you know, if my APY is, you
know, effectively 10% and that equates to for argument's sake
like $1000 a year, it won't be that.
I don't know what it's going to be, but let's say it is right.
But I'm spending $1000 a year and running this thing anyway
while I mean I'm not making any money, so I'm not going to bid
anymore and if I get dropped, I don't really care.
So then the stake comes down to account for that like just in
through natural auction dynamics, people will leave the
network and then the stake will come down.
The API will go up and say you know this is constant
rebalancing that's taking place which trades off operational
costs versus the revenue that's coming in versus the value of
the collateral, it's perceived future value and all these all
these kind of equations that each individual validator
operator is going to make. But from an auction dynamic
perspective, you know that means that we're always going to be at
a level of collateralization that across the validator set
trades off all of these different factors.
So hopefully this is a set and forget thing for us as protocol
developers. You know this is a system that
we've developed that we think will mean that we'd never have
to touch it. We know we need we there would
that won't have to be a discussion about raising or
lowering things unless it's sort of a central government, central
bank kind of situation right like where you control interest
rates and then that has not gone effects which effects people's
economic behaviour. So we could increase or decrease
the level of emissions that have been paid to validate is that's
the one lever that we can sort of adjust to influence the
auction dynamics there. So if we increase it, APY is
going to jump up and then people might want to stake more and
then you know that will lead to a higher level of staking into
at least in terms of flip. Vice versa, if we reduce the
level of emission, then there won't be as much rewards which
may cause people to drop off, which then may in turn lead to a
decreasing stake. So yeah, token economically, I
think it's pretty interesting. But you know, I'm A I'm a nerd,
so I don't know. No, no, it's great.
Yeah. And and this sort of governance.
Decisions like any. Maybe I should talk a bit about
how these are made. It's just like token voting from
flip holders or you know, what's what's the system?
Yeah, that could, that could be a thing.
At the moment the way we've got it set up is we kind of have a
governance council which right now is Chain Flip Labs and I
hope it will continue to be in that way for some time.
But we have token weighted voting in a in place to change
the governance council. If it's elect a new government
basically you could you could think of it as, but you know
obviously you know like any blockchain developer we do all
this in consultation with the community, in the stakeholders
and the validators and the LP's and everyone who's using the
system. Because ultimately you know that
that's that that's where the value is being driven, that's
where you all the stakeholders are.
So we're not going to do anything that we think will be,
you know, existentially bad hopefully.
But there is there are options the nuclear option for the
community to get rid of us if that's what's needed.
But yeah, when you're running your own blockchain network,
like, it's not that There's really no, it's not worth
pretending that there is another way of doing it at the because
like this is all connected to the validator software and
someone's going to publish that, someone's going to sign that.
You know, at the end of the day, you know the whoever is running
the development process, someone has authority at the ultimate
authority, including Bitcoin. You know, there are there are no
networks where this doesn't apply.
If you're running on a smart contract on someone else's
network, OK, that's a different story, but that's not the
situation here. I'm So any independent network,
any network for that matter has, has a similar dynamic.
So yeah, in the future we, you know, we could develop,
certainly develop like a a token weighted governance.
I mean the governance palette that ships with Substrate has a
lot of this in place already, but it would have to then be
linked back to all of the specific functionality that
we're voting on. So to even do a vote, the
developer would have to create the hooks in order to decide
between different outcomes for the token weighted voting to
even make sense. So yeah, it's governance is an
interesting one. But yeah, I think overall, you
know, the reality is, is that chain Flip Labs is going to be
leading the way, especially early on.
But yeah, we don't exercise any unilateral control over the
network or the people that run it or anything like that.
So you know we don't, we don't hold anyone's money which is
very important. But yeah from a governance
perspective you know we're we're really going to be trying our
best to iterate quickly especially in the opening first
few years because you know, we don't no one really knows how
this is going to play out whether or not the settings that
we said at the start were right or not.
And you know, so we have to, yeah, adapt based on what we
see, I guess. Yeah, yeah.
You know, that makes makes perfect sense to me.
I guess you can also like signaling.
Proposals or something I guess because also flip as I
understand is AESC 20 on Ethereum also, right.
So you could even use snapshot or what not, right.
So I guess there's a lot of ways to at least somehow involve, I
mean yeah, governance the whole topic that is quite complex.
So we we don't need to like dive much but yeah that's that's
helpful for understanding. So maybe also like one more
thing there is we were talking a bit about how new networks are
added and that's that basically like chain flip or like the.
Labs team in discussion with the validators Or this is decides
like a new network that should be added and then it will be
added to the software and from then on all the validators need
to run that additional clients. Yeah.
From a certain point, yeah, there'll be a release like a,
you know the consultation period then there'll be a a release
which enables them to add it and then at some point there'll be a
switch over which is triggered with an on chain governance
extrinsic. But you know if if we were to
just decide oh we're we're listing like coin tomorrow and
then no one's actually added it and then we don't run the
runtime upgrade and nothing's happened, then the whole thing
just stops. So you know we we can't we can't
just do whatever we want it doesn't work that way.
We we have to work in concert with the whole validator
network. So we talked a lot about like
the system of of chain flare, but obviously you've been
working on it for the last three years maybe.
To to slowly wrap things up, can we we can talk a little bit
about you know where you are at right now the road map maybe
also did you know what future use cases you could imagine like
chain flip network being being used for I guess yeah let's
let's let's get to that. So maybe we start with you know
when when mainnet and you know well just between you and me and
I guess everyone this thing which is not very secret I
suppose, but we have already conducted A stealthy main net
sort of soft launch. We're not going to use the
network that we we did that with.
But we you know just wanted a sanity check all of our work and
make sure that what is working on test net right now which you
can go check out live at any time is you know makes sense on
main net and you know things like gas estimations and all
that work out and it worked. So we did find a couple things
but you know we are we are very much there now after three
goddamn yes, we're it's fine finally putting it out.
We have a a loose tge date so the main net is going to be live
in the next two weeks, but it won't really be live because it
won't be public because no one we had a stake to it or do
anything like that because they haven't got the tokens to do it.
So the actual token distribution, go live, date
everything, auctions, beginning, all that kind of stuff.
So far it's been slated for November 8th.
I hope that date holds and by the time this goes out that may
have changed, maybe not. We'll see.
Launches like this are always a moving target.
You know, there's a lot of things to consider, you know,
both with main net operational concerns, but then also
commercial concerns as well with exchanges, custody and so on and
so on and so on, which we've been working very hard on as
well. But yeah, finally that item on
the road map ticked off. Boom, Hopefully by the time you
listen to this, it'll already be live.
Then that's straight after that we have a period where we need
to allow the validators to collateralize the network.
So as I alluded to before, you know starting at a stake OF0
with we have like just three boot nodes basically that don't
really have much of a stake. You know that needs to grow to
150 validators with a fairly significant stake in order for
us to be able to safely deposit liquidity into the system for it
to be secured. So we're leaving it running for
a few weeks. We don't know exactly when
that's going to be yet. We probably need to see what
happens in the first couple weeks to be able to lock in a
date for swapping to go live because, you know, we don't want
to ask LP's to be throwing millions of dollars into the
liquidity pools if there's like, you know, only 10 Valinators or
something crazy like that. So I don't think that's going to
happen. But, you know, we have to, we
don't want to ask people to do anything crazy like that.
So yeah, the the idea is hopefully by the end of
November, which is rapidly approaching as winter sets in,
time is accelerating. Thank God I'll get through this,
this cold spell. But yeah, the swapping itself
will go live. LP's will be able to make
deposits, users will be able to make swaps will be live and
squid router from day one. So you know a complete end to
end user experience will be there.
Also got several other wallet and aggregator integrations as
well in various stages of development.
And so yeah, hopefully we'll be able to generate you know some
of that early volume and and and hopefully the whole thing will
make sense economically from end to end.
It might not, but you know that's that's the nature of the
business. You know you got to going to be
in it to win it. So yeah, in terms of follow on
road map stuff, we've got a bunch of new features that we're
going to bring out before Christmas and then into the new
year as well including new block chains, new features to make
swapping faster, make it cheaper, make it better, make it
more competitive in the aggregator market.
You know and you know things like this fill or kill feature
that I talked about before as well.
Yeah, we've got something in the works with, in regards with the
USDC and cross chain transfer protocol by circle themselves
which allow for seamless liquidity rebalancing across a
lot of different block chains, which will be very, very cool.
Again, a part of that efficiency piece making sure we're not
fragment, we don't have like a USDCUSDC pool on like two
different chains because like why?
Why would you do that if you don't have to?
You're just wasting U.S. dollars that could be deployed to fill
actuals like swap swaps, you know.
So yeah, the road map is endless, You know, there is,
there is so many things that can be done in this vertical to
improve it for users, be that more chains, more assets, making
the swaps faster, making them cheaper and so on.
But you know, you asked before what else could the chain flip
network be used for? And the answer is nothing.
We we do this. You know, a lot of projects like
try to sell you the world. You know this is the
interoperability solution. It can do all of the things.
And yes, we have cross chain messaging, but only so we can
make the swaps compatible with aggregation.
We only do swaps. We only do native cross chain
swaps. We spent three years on it and
we have a feature list of mile long to make that better.
So you know you won't see us doing a lending product, you
won't see us doing some sort of yield farming thing, although we
can do like liquidity programs and stuff, but it's all in
service of cross chain native swaps that is our vertical and
we're staying well within that. You could use this architecture
if you were to like go away and re engineer it.
You could maybe use it for other things as well, Some sort of
cross chain lending protocol. You could build a derivatives
platform that settles all these different chains and stuff.
But there's already a bunch of protocols that do that.
You know, this has been specifically engineered so you
can go swap half $1,000,000 in Bitcoin in a completely
decentralized fashion in under a minute with 0 slippage.
I mean, if that's not cool enough for you, I don't know
what is. Felix, I'm really sorry but I
can't help you. Liza, let's That's a great pitch
and I'm I'm very excited to see your work of the last three
years go live soon. So we're regarding this October
12. I think we're actually going to
release this like quite soon. So might be that it's live
before the RX live maybe we'll can we can like hold out a bit
and release it with the actual launch would be great.
But yeah thanks so much for expanding and I I do think right
that focus is key. I think that one thing that I
also learned over the last five years in crypto is that, you
know, yeah, sometimes projects maybe that haven't received that
got the traction with their. Like core thing try to sell you
everything else in in a like attempt to like sort of stay
relevant or sort of find something that has PMF.
But maybe it's maybe it's better to like stay focused on on the
one thing and and especially if that has traction double down on
it. I mean yeah UNISWAP being maybe
one example for that or also DYDX which like sort of like
with their, I mean I've experienced personally as well
with session. I mean you know in the first two
years it was it was not good you know the the adoption was not
good but the app was also not very good.
But we didn't give up. You know we kept working at it
and now you know we're experiencing month on month
downloads growth consistently without spending any money on
marketing you know so finding product market fit, I think
people have very short term expectations in this industry.
You know it's either pops off now or it's it's dead.
But if you that is true for a lot of things which are sort of
don't really have strong fundamentals.
But for something like this where you know people are
swapping billions of dollars of Bitcoin every day and we're
developing a unique venue for it.
It may take time it may take you know several months, several
years before you know this achieves some of product market
fit. I don't think so.
I think I'm going to market strategy is good but you know
I've I've experienced personally that if you if you believe in
the fundamentals of the product vertical that you're operating
within and you're willing to be able to adapt your thesis and
and and adapt to the market as you go live.
I. I think that, yeah, sticking to
a vertical is absolutely the way forward for for many teams at
this point in this level of maturity that we've achieved in
the crypto space over the last decade.
Awesome, Simon, thanks so much for coming on today.
And yeah, we'll link a bunch of the documentation and stuff in
the show notes. And yeah, glad to see champs of
life soon. And thanks so much again.
Let's have you guys. Well, thanks so much, Felix.
Thank you for joining us on this week's episode.
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