Beyond The Bridge: Exploring Use Cases for the Elk Network
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, which…” At this point, as I launch into the transformative vision for the Elk Network, they’ve usually completed their ElkNet transfer and left the chat.
The fact 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 learn what many already know, which is that our cross-chain value transfer protocol (yes, OK, the bridge) is one of the most convenient ways to get 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 those feats of engineering and upkeep typically end up benefiting what lies on either side.
In this article, I will briefly lay out the case for why the Elk network should be seen less as a bridge and more as a multi-functional DeFi gateway. I will start by describing ElkNet in its present form and the utility of the ELK token, before moving on to explain two forthcoming upgrades that demonstrate Elk’s broad vision for the future of multi-chain DeFi. These are:
- CHFT, a multi-chain native stablecoin
- Proxy tokens, cross-chain virtual assets
The Elk blockchain, with ElkNet at the center, is designed to overcome the current limitations of existing bridges and blockchain interoperability more generally. In short, the three main problems are:
- The Bridge Fragmentation Problem
- The Exit Liquidity Problem
- The Interchain Messaging 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 bridge 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 become incompatible once they arrive at their destination. This creates confusion and stunts growth by producing thin liquidity pools with artificially high price impacts 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 a 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. The fundamental problem with this model, however, is that there needs to be enough tokens already locked on the destination chain (Chain B) to complete the transfer. If there are not enough tokens — which is a fairly common occurrence — the transfer fails, and the bridge becomes unusable.
There are ways to minimize the exit liquidity problem, such as bootstrapping a bridge with exit liquidity furnished by the protocol 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 bridges are in highest demand.
The Interchain 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 blockchain. 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 network provides elegant solutions to overcome each of these problems, while simultaneously unlocking new use cases that leverage ElkNet’s unique cross-chain architecture.
ElkNet & The ELK Token
ELK is Elk’s native settlement currency. Unlike conventional bridges, ELK is the only token that moves across ElkNet, which connects the Elk network to every network Elk supports (as of this writing: Avalanche, Polygon, Fantom, Huobi ECO, xDai, and Binance Smart Chain).
All liquidity pools on our multi-chain 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 tokens of their choosing. Cross-chain swaps automate this process, allowing users to trade arbitrary tokens, which are seamlessly exchanged for ELK under the hood.
This model has multiple advantages: since there are no wrappers or bridge tokens involved, there is no fragmentation introduced. Users can of course swap their tokens for an existing bridge token, but ElkNet does not add to the fragmentation problem by introducing new tokens. This is why Elk is best 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 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.
ElkNet also provides an original solution to the interchain messaging problem, since it has a data relayer 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 genuine multi-chain dApps and smart contracts. In this way, you can think of ElkNet as a kind of 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 swap. This is the main tradeoff for solving the exit liquidity problem, and it is the reason that pairs on ElkDex are always bonded to ELK.
Ensuring that pools have depth across all chains is therefore key to making the Elk blockchain function. ElkNet is also able to interface with other network AMMs, applying a “smart order routing” algorithm to find the most efficient trade path for the tokens on either end. Using DEX aggregation, users will be able to swap any token they wish with minimal price impact.
Since ELK is not a pegged token, its price can deviate across networks, resulting in potential price disparities during cross-chain transfers. As many in our community have already discovered, however, this “problem” also presents an arbitrage opportunity, such that bridging can actually result in net profit in some cases. As Elk grows, price arbitrage will surely become more sophisticated, ensuring relative price parity across all chains.
Of course, many traders would prefer to avoid any price differential as they moving between chains. With this in mind, we are preparing to release a stablecoin designed to interact with ElkNet.
CHFT, A Multi-chain Native Stablecoin
CHFT will be the first cross-chain stablecoin based on an innovative “gyroscopic” design, which allows it to be minted natively on any 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. Users will be able to mint CHFT by using various whitelisted tokens as collateral. CHFT tokens will be overcollateralized, meaning that users are required to deposit tokens whose value exceeds the amount of CHFT minted based on a collateral factor assigned to the token being used as collateral.
This design follows the most common method for issuing stablecoins collateralized with cryptocurrency. Once CHFT has been minted, however, users can be freely move to any chain to any chain via ElkNet at a stable 1:1 ratio, where it can be traded, pooled, or farmed. 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, users can simply move CHFT to another chain where collateral is available. Since CHFT is overcollateralized, there is little risk of liquidation, and there is guaranteed to be exit liquidity available.
Proxy Tokens: Cross-chain Virtual Assets
While ElkNet addresses the problem of bridge fragmentation, the very existence of bridge tokens demonstrates a broad-based desire among DeFi users to trade, provision liquidity, and farm for yield using assets that are currently segmented across dozens of networks. Our proxy token concept offers a practical solution to the bridge fragmentation problem by decoupling a token from its underlying asset, liberating it to move among networks in a similar fashion as ELK or CHFT.
In this case, users will be able to mint proxy tokens by locking the asset they wish to convert into a proxy token along with a small amount of ELK. Unlike CHFT, proxy tokens are issued in a perfect 1:1 ratio, and it can be redeemed for the underlying asset at any point.
Proxy tokens offer a solution to the exit liquidity problem since they are converted into a virtual asset on their chain of origin (similar to a wrapped token), meaning that no exit liquidity is required on the destination chain. Unlike a conventional wrapped token, however, proxy tokens can move 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 their uses in time. 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 potential involves multi-chain dApps, where the supply for a token can exist on a single chain, and proxies can be used to deploy 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 potential use cases for the Elk network. We’ve only started to imagine all of the ways that each will be used, and we are excited to see what novel concepts the community invents for them. Together, they demonstrate how Elk is much more than a mere bridge; it is a true DeFi gateway.