After the collapse of several multi-billion-dollar centralized crypto providers, builders, investors, and users are all waking up to the significance of being able to trade without counterparty risk.
In the last ~3 months alone, we saw one of the world’s largest and most heavily backed exchanges implode in spectacular fashion, leaving holes in the balance sheets of dozens, if not hundreds of companies, including the largest institutional lender, which just filed for bankruptcy. Millions of investors — both retail and institutional — are now out of pocket.
As we tinker in the hopes of building DeFi products that are so compelling they can catalyze a mass exodus from CeFi and make these types of failures an impossibility, we need to understand why users continue to trade and custody their assets on centralized platforms in spite of the evident custody risks.
The reality is, until DeFi can give users a consistent, predictable, and truly user-friendly experience that rivals that of centralized platforms, we will struggle to gain the kind of network effects we’re hoping will bring us towards mass adoption. At deBridge, we believe that DeFi’s slippage issue is a fundamental part of this challenge, and something we’re working on to tackle.
What’s the issue with slippage?
In the CeFi world, liquidity is king. Participants invariably favor exchanges where assets can be bought and sold with the highest frequency and ease, where buyers and sellers can execute trades quickly at the fairest prices and minimal difference between requested and executed price.
DeFi is not immune from these dynamics simply by virtue of being non-custodial. If we’re pushing for an exodus away from centralized exchanges, we need to compete on these same metrics, and abstract away (or make redundant) complex parameters like gas, nonces, slippage tolerance, and general unpredictability.
Even for experienced users that are savvy enough to play with these parameters, the end-result is still nowhere close to the levels of capital-efficiency and ease a user would experience on a centralized exchange. If the slippage tolerance parameter is set too low, the transaction may fail due to insufficient liquidity in an AMM liquidity pool or a minor price change before the trade is executed. If it’s set to be too high, the transaction is immediately front-runned by MEV bots, which manipulate the price in the liquidity pool in the same block to extract the slippage amount specified by the user.
Because of this, a few sophisticated MEV-searchers reap the rewards, while average users are shortchanged every time they make a trade or bridge across chains.
Here, we see an example of a transaction where the user exchanged $50,000 USDT for USDC via a stablecoin swap. The amount the user expected to receive was $49,860 USDC, but due to the wallet’s default slippage setting of 2%, the transaction was attacked by MEV bots, resulting in the user receiving a staggering $1,000 USDC less than anticipated.
In this case, the slippage tolerance was set too high, and because the transaction was sent through the public mempool, MEV bots were able to track and exploit its price before confirmation.
It’s abundantly clear that if users can’t trade at fair prices or even be sure of the amount they will receive, DeFi will remain at best a marginal technology reserved for sophisticated users that can stomach these terms in hope for significant returns in the future.
Perhaps equally importantly, this dynamic also means DeFi cannot become a healthy, liquid market where automated strategies like market making bots can operate effectively, or professionals/High-net-worth individuals can make 6, 7, or 8-figure trades without losing prohibitive amounts of capital.
Bridges have a big problem
Innovations like 1inch’s limit order feature prove that DeFi is starting to work on this problem, giving users a way to specify the amount they want to receive when they make trades on a single chain.
But when it comes to cross-chain, it’s a different story. The entire paradigm of classical bridges almost guarantees that users will incur tremendous amounts of slippage each time they make a trade. As we’ve highlighted a number of times, this is on account of the fact that classical bridges are built as liquidity protocols, where all transfers are channeled through shared liquidity pools that use an on-chain price discovery mechanism based on AMM models, instead of infinitely more efficient off-chain price discovery.
This "continuously locked liquidity" model has many flaws, including:
- The maximum amount that can be transferred is always limited by how much value is locked on the destination chain.
- Reverted transactions, which happen when other transfers are processed before the user's transaction becomes final, cause more slippage than the tolerance parameter setting allows for.
- Long finality, where the sender has to wait a long time (e.g. 256 blocks or 13 minutes for Polygon transfers) before the transfer is settled on the destination chain.
- TVL depends on having liquidity mining incentives, which are inevitably deprecated over time as mercenary capital goes where rates are higher.
This approach is fundamentally flawed, and can never give users the type of experience they have come to expect on a centralized exchange. Perhaps more importantly, it places a limitation on the very usefulness of DeFi.
A model for cross-chain liquidity that puts users first
After spending a lot of time thinking about this problem, we have decided that the only viable solution (at this point in time) is to entirely step away from the bridge/liquidity protocol model. In Q4 last year, we introduced deSwap Liquidity Network (DLN), a new paradigm for cross-chain liquidity that creates a sustainable mechanism for cross-chain value transfer with none of the trade-offs of the classical models.
DLN is a completely new type of decentralized exchange and value transfer protocol enabling any assets to be traded cross-chain, natively, while protecting users from MEV and slippage. For the first time, users will be able to exchange any amount of value across chains with limit orders, receiving not a cent less than they specify.
DLN paves the way for:
- Limit orders for any cross-chain asset exchange
- Zero slippage on any order side
- Unlimited market depth
- Guaranteed rates and low fees
- Fast settlement for cross-chain transfers
- Gasless orders
A non-custodial future
It’s clear that if liquidity can be moved quickly, securely, and predictably across any chains, DeFi will finally be in position to disrupt centralized providers and make their trade-offs too obvious to ignore. If users can essentially have the exact same experience as a CEX trading with full custody from their wallet, why would they ever use another exchange?
With DLN, anyone will be able to leverage all the features they would expect from a centralized exchange, but with the level of confidence that no legacy bridge can offer right now. From new DeFi entrants to advanced users, everyone will be able to swap any assets on any chains from one interface (you can see an early demonstration of DLN here).
Reach out here to be amongst the first to enable seamless zero slippage cross-chain transfers for your protocol or application, or to participate in the network and start monetizing your idle liquidity.
deBridge is a secure cross-chain infrastructure that enables truly efficient interoperability between blockchain ecosystems. With deBridge, teams can build safer, simpler, and more scalable cross-chain applications free from the risks of locked liquidity, high fees, and large slippage.
For more information visit: https://debridge.finance