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The Importance of Decentralized Custody and Cross-chain Swap

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Decentralized Finance

Distributed blockchain technology eliminates custodial risks where users can truly own their tokens without the need to delegate custody to a centralized third party such as a bank. It also enables functionalities like atomic swap and more sophisticated on-chain actions via self-executing smart contracts in a counterparty-risk-free fashion.

It also kickstarted a DeFi (decentralized finance) movement, where users can be their own banks and get exposure to transparent financial products and derivatives on trustless blockchains. DeFi applications include lending, trading, insurance, etc. that are empowered by on-chain smart contracts and sometimes off-chain scaling solutions. DeFi protocols have garnered significant growth in user adoption and media attention, and the total value locked in DeFi currently exceeds two billion dollars.

Blockchain technology is intended to facilitate peer-to-peer exchanges of cryptocurrencies and tokenized assets. However, there are many blockchains in the world with different characteristics, consensus algorithms, hashing algorithms, etc., and they do not communicate with each other. Many DeFi applications work on one specific blockchain, such as Ethereum, EOS, Fusion, etc. DApps (decentralized applications) are restricted to transact using tokens native to their underlying blockchains, which make them isolated from the majority of liquidity in the crypto space. 

For example, The Bitcoin network does not support smart contracts, yet BTC dominance remains around 63% in market capitalization. That means most values in the crypto world are detached from any DeFi protocols if different blockchains cannot interact with each other. This is why blockchain interoperability is essential for DeFi to unleash its full potential and eliminate the huge barrier to mass adoption.

Cross-chain Interoperability

In our traditional financial system, sending money abroad in foreign currency is cumbersome. The legacy SWIFT payment network is slow and costly, as your asset needs to go through a lot of intermediaries. The exchange spread can also be huge, given the limited choice in licensed remittance service providers. The existing banking systems across nations are closed systems that are old, convoluted, and mostly isolated.

Therefore, we need an open and interoperable protocol in the crypto space that connects heterogeneous blockchains together and enables seamless asset exchanges among blockchains. All blockchains should be able to interact with each other using a pre-agreed protocol in a frictionless fashion. This cross-chain protocol should also be permissionless so that liquidity ranging from high-cap coins like Bitcoin to low-cap tokens can all flow freely among the sea of blockchains. Any developer can build DApps to provide client access to such interoperable communication protocol.

That means we need to create an environment such that exchanging cross-chain assets is as smooth as swapping tokens from the same blockchain in practice. Novice crypto adopters can even swap assets without realizing the difference. DEXes (decentralized exchanges) can also be built on any smart-contract-aware blockchains and support the trade of external tokens.

Decentralized Custody

So how exactly can you swap BTC for ETH on-chain without using any centralized intermediary?

WBTC (Wrapped Bitcoin) is an ERC-20 token that is backed 1:1 with Bitcoin. Anyone who passes KYC can mint WBTC on the Ethereum blockchain by sending Bitcoin to BitGo, a centralized custodial service provider. There are currently 11.5 thousand WBTC in circulation backed by the same amount of locked BTC. It recently becomes the second-largest collateral backing DAI, a decentralized stablecoin governed by MakerDAO, shortly after it was approved to be a new collateral asset on the protocol on May 3rd.

WBTC gained popularity lately on the Ethereum blockchain as yield farming and liquidity mining drive its demand. However, this is detrimental to the growth of DeFi. This is because a centralized custodial solution for cross-chain interactions defeats the purpose of a trustless, permissionless, and censorship-resistant DeFi ecosystem. We need decentralized custody for cross-chain communication to maintain the integrity of the DeFi ecosystem, and to eliminate any single points of failure in the system.

The DCRM (decentralized control rights management) technology is a decentralized escrow solution for the broader DeFi ecosystem. It leverages zero-knowledge proof, key sharding, and homomorphic encryption. Key shards are generated by multiple nodes independently, where each shard represents a fragment of the key. The whole private key is never reconstructed at any stage from key generation to signing transactions and asset storage. Therefore, no single node can act maliciously and steal assets held in escrow. This technology is open-source and vetted by world-class cryptographers in the world.

Anyswap

Anyswap is a one-stop-shop for cross-chain swap powered by DCRM on the Fusion network. 

Similar to Uniswap, it is a constant function market maker that facilitates fast token swaps by bootstrapping liquidity. In traditional exchanges, market makers need to wait for orders to be filled; whereas on Anyswap, any swap order is executed straight away. Users with idle assets are incentivized to provide liquidity to the pool and earn passive income by collecting swap fees, while users can trade with real-time prices powered by the integration of Chainlink’s oracle price reference data.

Different from Uniswap, nevertheless, Anyswap supports swaps among tokens from blockchains that utilize ECDSA or EdDSA as a signature algorithm. That includes most popular blockchain networks such as Bitcoin, Ethereum, Ripple, Litecoin, Fusion, etc.. There is no counterparty risk in DCRM protocol, as private keys are sharded and distributed among running nodes.

End-users without any technical know-how can benefit from the abstraction taken on the Anyswap platform to facilitate direct cross-chain token swaps. Users can interact with the platform using popular wallets such as Metamask or Ledger wallets, and more hard wallets will be supported at a later stage. Anyswap protocol is open-source and can be integrated into any wallet using its API.

On the Anyswap website, the “Bridge” tab enables users to deposit any external coins such as BTC and ETH into the protocol and mint wrapped tokens powered by the DCRM technology. The “Swap” and “Send” tabs enable users to execute on-chain token swaps with a recipient of their choice. The “Pool” tab lets users earn passive income by providing liquidity to the liquidity pool. 

The Anyswap protocol adopts a decentralized governance protocol with the introduction of a governance token ANY. ANY token holder can vote for adding supported coins, electing Anyswap working nodes, and changing governance rules proposals. From July 20th, a liquidity mining program will commence encouraging and promoting the use of Anyswap. 85 million ANY will be distributed along with the Fusion network blocks among Anyswap working nodes (10 million), liquidity providers (15 million), the development team (15 million), the company shareholders (20 million), and swap traders (25 million). This constitutes 85% of the total supply of ANY.

In a nutshell, decentralized interoperability is crucial to the mass adoption of DeFi, as it enables secure, trustless, and permissionless cross-chain token swaps. Anyswap takes advantage of the state-of-the-art DCRM protocol on the Fusion network to realize a decentralized cross-chain swap without any counterparty risks. The platform also serves as a one-stop-shop that provides seamless cross-chain swap services and is governed by ANY token holders.

Disclaimer: This is a paid post and should not be considered as news/advice.

Akshay focuses on UK and Indian markets. As a crypto-journalist, his interests lie in blockchain technology adoption across emerging economies.

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