Composable Finance
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Composable Finance

Dissecting the XCVM use cases for cross-chain applications

The Composable cross-chain virtual machine (XCVM) enables an entirely new ecosystem of dApps through its novel capacity for cross-chain smart contracts, interoperability and modular functionality. In this article, I intend to explore the various use-case applications for DeFi that the XCVM can enable and the impact that I think this technology can have on the next generation of innovators, namely, those who will create cross-chain functional applications that the masses can use.

An overview of the impact generated through the XCVM

Traditional markets and stock exchanges were formed in a similar fashion to the emergence of the XCVM. DTCC acted as a reconciliation layer that enabled markets to communicate with one another. This allowed for the formation of new tools built on this functionality, such as High-Frequency Trading (HFT), Dark pools, and other interoperable, more effective financial instruments.

This reconciliation led to the development of apps like Robinhood, which sit on top of the amalgamated stack and abstracts the backend to deliver a seamless process for regular, non-sophisticated individuals to enter the financial markets. The XCVM is set to take DeFi along a similar evolution by allowing innovators to roll out the next generation of applications that leverage DeFi’s traditional primitives but also provide users with a single interface management experience. The consolidation of DeFi through one interface is core to the design of the XCVM and key to creating a modular, interoperable architecture for the mass adoption of DeFi. To me, the design of the XCVM and the results for developers and users represents the future of DeFi applications.

By providing a generalized instruction set capable of functioning across various ecosystems, the XCVM enables the deployment of natively cross-chain protocols. For example, a developer could create a protocol with the XCVM to trade with leverage, trade options, and insure their positions from a single interface. This is because the XCVM allows for developers to call smart contracts on any chain housing the necessary satellite contracts.

Thus, not only could the developer create an application capable of utilizing various pre-existing contracts to perform all of their tradings from one place, but with the XCVM, it makes no difference which blockchain these pre-existing contracts reside on. To emphasize this further, a developer could leverage the XCVM to utilize an insurance market’s contract on Ethereum to provide cover for a loan withdrawn from a lending protocol on Arbitrum or a simple LP position on Polygon.

Another example of cross-chain protocol deployment could be through a single interface of an application on the XCVM that allows you to swap the native asset on any DEX (e.g., ETH on SushiSwap) on the corresponding chain and engage with a liquid staking protocol on Ethereum (e.g., Lido)

The Composable technology stack enables a modularly functional DeFi ecosystem and will be home to a novel suite of cross-chain, decentralized applications (dApps). I have separated some dApps that can be developed along the following categories: aggregation, arbitrage, on-boarding ramps into DeFi, and tooling. The applications highlighted are early in their ideation yet align with what we would like developers to build using the XCVM. For interested parties, grants are available to eligible projects, and we offer hands-on support to teams and developers during the development process.

Aggregation

Aggregation-based dApps can leverage Composable’s cross-chain infrastructure to allocate resources across DeFi. A user interested in taking out a loan would be able to achieve the best available interest rate across DeFi’s chains and layers. If getting the best swap rates is the goal, users could get the best available exchange rate via another dApp without jumping through multiple hops. This new method of aggregating resources could allow for new forms of concentrated lending and risk pools.

Aggregated dApps could thus remain a consistent feature of the Composable ecosystem, regardless of the state of the market or the current state of liquidity fragmentation. Liquidity is often fragmented in bull markets, as users chase asset appreciation across chains. In such times, aggregation dApps are essential. However, in bear markets, the need for aggregation arguably intensifies even further. As liquidity diminishes, so do opportunities to provide liquidity and earn yields. In such a situation, blue chip assets benefit even further from aggregating yield opportunities. Ultimately, aggregation can form a key, fundamental dimension of applications built on Composable.

Cross-chain yield aggregation

Yield aggregation is among the most attractive opportunities for profit-seeking in a cross-chain future. By leveraging the XCVM, developers can create XCVM contracts capable of finding the best yield across several ecosystems. Beyond just finding the best yield available, developers can also build increasingly complex applications from this strategy.

Visualization of a cross-chain yield aggregator

For example, XCVM developers can build a cross-chain yield optimizer contract that monitors stablecoin pools across any protocol or application within the Cosmos, DotSama and NEAR ecosystems through Centauri. Similarly, users could swap their assets to the stablecoin pair that offers the highest yield at the time using a DEX like Pablo. This process can be repeated to seek the optimal yield on their stablecoins continuously. Furthermore, this strategy could include EVM-compatible chains from one deployment on the XCVM.

Cross-chain lending aggregation

Developers can create an XCVM program capable of monitoring various lending pools across different chains to help users seek the best rates. Such an XCVM-based dApp would monitor other lending protocols across DeFi at large. Users would then deposit collateral or notify the XCVM-based dApp of collateral they wish to use stationed on a different chain. The dApp would then return the user the requested loan for the best available rate.

Lending and liquidations come hand in hand. Therefore, an increase in cross-chain lending necessitates cross-chain liquidations. With the XCVM, developers can manage these cross-chain liquidations from a single CosmWasm contract.

Cross-chain rebalancing

With a robust liquidity layer, the XCVM can facilitate sufficient liquidity across all connected ecosystems. This means developers who choose to build XCVM applications can capitalize on cross-chain opportunities without worrying about whether sufficient liquidity is available for their bridging needs.

Additionally, a foundational piece of this liquidity layer is just-in-time liquidity bots. These bots provide active liquidity management where passive liquidity providers cannot meet transaction needs. The XCVM allows for the creation of dApps that empower such liquidity bots and enable them to coordinate liquidity across chains. These bots form a lucrative opportunity for developers but also help improve the capital efficiency of the DeFi markets.

Arbitrage

Arbitrage-based applications recognize each chain for one of its essential functions: markets. There is a huge disparity between these different markets. This opens the door for XCVM-based cross-chain smart contracts that fulfill order matching based on the coincidence of wants (one side wants to buy an asset at a specific price, and another wants to sell an asset at a particular price). Executing this cross-chain spanning ecosystem presents an opportunity for profit that applications on the XCVM can take advantage of. This topic was covered in the first episode of Chaos Composed, a podcast I hosted with guest Julien Bouteloup.

Cross-chain market arbitrage

Developers can leverage bridges such as Centauri to take advantage of cross-chain arbitrage opportunities as Composable connects the largest ecosystems within DeFi. By calling into our tech stack through XCVM applications, developers are able to identify these opportunities and facilitate cross-chain swaps to take advantage of them.

For example, a developer could create an XCVM application capable of leveraging satellite smart contracts to monitor liquidity pools across various ecosystems. Upon identifying an arbitrage opportunity, they could then:

  1. Deploy their capital to that ecosystem via bridging infrastructure such as IBC
  2. Facilitate the swap
  3. Bridge these tokens to another ecosystem, and
  4. Swap again to realize gains from the arbitrage opportunity
An example of how an XCVM contract could coordinate cross-chain arbitrage via satellite contracts

Cross-chain MEV

Cross-chain instructions are susceptible to cross-chain maximal extractable value (MEV). Currently, there are insufficient incentives for relayers in the ecosystem to operate, which means they do not operate sustainably. Due to the architecture of the XCVM, we are opening up the ecosystem by introducing the opportunity for relayer providers to operate with a steady stream of income for market efficiency through cross-chain MEV. This could involve relayers and validators collaborating based on messages passed via IBC ensuring cross-chain transactions are successful even when users engage in functions across multiple chains.

As we work to confront MEV in the DeFi ecosystem and explore opportunities to leverage the idea for a sustainable future, we will continue to do more research. You can look forward to more information on this topic.

Institutional Onboarding

On-board ramps into DeFi represent the third dimension along which we believe most applications on Composable will be built. Different centralized crypto-neobanks have emerged that maintain custody of crypto assets whilst providing simple liquidity provisioning and staking rewards. Composable aims to allow the development of decentralized neo-banks that can service yield needs cross-ecosystem through the XCVM.

The XCVM can also function as an accessible entry point for such crypto on-ramps or crypto portals to begin servicing large volumes of retail investors. In addition, the XCVM can form an easy point of entry for institutional organizations to begin investing in the crypto space, as it would allow them to abstract the complexity of cross-chain DeFi and focus only on what they wish to earn.

Cross-chain counterbidding

Cross-chain transactions currently lack established solutions to prevent frontrunning. This is a critical infrastructure gap, as there can be bots on both sides of a cross-chain transaction that can front-run it, manipulating the market for their own gain. The chain or cross-chain infrastructure itself can act similarly to a front-running bot, submitting more optimal bids (higher, lower, higher slippage, etc.) than what the front-running bots themselves are trying to do. This would allow the transaction to be protected from the front-running of bots for a short period of time.

An example could be if a user is swapping OSMO for another asset on another chain, then this message is propagated to the other chain. From there, the (para)chain itself could counterbid and take the other side of the trade to result in frontrunning protection for a small period of time on this transaction. Basically, this would act similarly to a short-term loan that fulfills the other side of users’ transactions.

By simply calling application programming interfaces (APIs) without needing to know the CosmWasm framework or to understand the minutiae of the XCVM, institutional organizations can leverage our cross-chain technology, including counterbidding as a service. This has a number of practical applications for users, making blockchain much more accessible for institutional entities to diversify their offerings.

Composable HFT offering

The XCVM was designed to handle a large volume of users and order flow passing through its Routing Layer. The Routing Layer was crafted to allow decentralized actors to compete for the best execution for flow through the XCVM. This layer was intentionally designed to outcompete other solutions and deliver the highest speed and value. This makes the XCVM an option that can be highly appealing to high-frequency trading (HFT), which relies heavily on the ability to quickly and effectively determine optimal order routing. Furthermore, HFT is complemented by the Composable parachain on Polkadot, which is capable of handling institutional scale throughput.

Composable’s XCVM can be offered as a product for financial organizations that already use HFT. Such financial institutions can use the XCVM to determine optimal orders at a speed and precision that could potentially outpace their existing technology for this practice. The XCVM and its routing layer can also open up DeFi as a new domain for profit for these organizations. This would allow these groups to use HFT to run the best routes for order flow and increase the strength of their returns.

Cross-chain collateral management

Just as XCVM developers can find the best available lending rates through its cross-chain infrastructure, the XCVM can also create a program capable of managing collateral across lending pools located on different chains. Automating this process would save users time and money while also greatly reducing the risk associated with managing cross-chain positions.

Improved User Experience

A multi-chain future is inevitable, and yet cross-chain infrastructure up until this point has failed to provide users with a DeFi experience they are comfortable with. At Composable Finance, we have crafted our foundational pallets and XCVM interface to replicate better an experience DeFi users are familiar with to enable a smoother transition to a cross-chain future.

Cross-chain derivatives markets & products

Options are coming to DeFi in force, with new protocols and even entire blockchains spinning up that fully embrace these legacy finance instruments. Opening and closing cross-chain multi-leg options positions could be something the XCVM enables across various blockchains.

It’s possible to build substrate pallets as the base level infrastructure for perpetual swaps, options and other derivatives products. Still, eventually, the XCVM could allow you to integrate with different protocols and introduce funding rate arbitrage, options aggregation and arbitrage, impermanent loss hedging, delta neutral strategies, hedged market-making vaults for CLOBs, DEXes and more. An example of what the XCVM unlocks could look like creating strategies where one leg is on a derivatives platform on Arbitrum (such as Dopex), and one or multiple legs are on a platform on Cosmos (such as dydx). That way, you can tap into their users to drive from various ecosystems and unify liquidity and orders across the DeFi space.

Cross-chain insurance

Insurance is a new and invaluable tool for DeFi users. Currently, there are no insurance protocols that accept your collateral on one chain if the loan is taken out on a different chain. With the XCVM, users would be able to insure against their positions across multiple different chains. Cross-ecosystem functionality could become necessary for insurance markets once applications like Angular Finance are launched.

Cross-chain DEX aggregator/asset management

Cross-chain portfolio management becomes infinitely easier with the introduction of cross-chain DEXes such as Pablo. Users and developers alike should benefit from unparalleled access to all of DeFi’s most liquidity-rich ecosystems. As seen in 0xslenderman’s presentation at Unchained, the XCVM takes things one step further by introducing “compositions” as opposed to regular swaps.

Compose w/ XCVM user interface

With the XCVM, users could string together multiple transactions, with multiple assets, on multiple chains, through a single interface. Users could then track the progress of their cross-chain transaction with the “stepper” and our cross-chain block explorer.

Simplify menial tasks

XCVM opens the door for a greatly improved user experience. Users, for example, may want to start staking on a specific ecosystem from another ecosystem. A user may have USDC on Ethereum and then stake it on Cosmos. Usually, you would need to:

  1. Find the best bridge
  2. Bridge your USDC from Ethereum to Cosmos
  3. Wait
  4. Swap your USDC to ATOM
  5. Wait
  6. Stake w/ your preferred validator

The need to do this repeatedly was a common occurrence in DeFi. It becomes a very menial and time-consuming task if users were to dollar cost average into a staking position on Cosmos. With the XCVM, you could write a single program capable of doing this for you. This program could even be extended to support other tokens and released as a service to users who want to perform the same transaction.

Cross-chain AMMs and DEXs

The unification of DotSama, IBC, and EVM compatible chains opens the door for a new generation of cross-chain automated market makers (AMMs) and decentralized exchanges (DEXs). This opens up opportunities for cross-chain liquidity pools and swaps. For example, we could see users trading ATOM/KSM on AMMs and DEXs within the Composable ecosystem. Pablo, our protocol-owned liquidity DEX on Picasso, could be the first example of this.

Cross-chain asset pools w/ ATOM and KSM tokens on Pablo

Through the utilization of our transport layers like the XCM, and Centauri (Substrate-IBC bridge), XCVM developers are able to facilitate cross-chain token swaps. This can be accomplished quite easily by calling into the functionality of Pablo, our native cross-chain DEX which we have built into the runtime of Picasso as a pallet. For XCVM developers, facilitating a cross-chain swap could be as simple as calling a swap function from the Pablo pallet.

Cross-chain canonical tokens

Developers building on the XCVM can be assured they are dealing with the canonical tokens of each chain and project they interact with. By allowing developers the ability to deal with canonical tokens instead of wrapped tokens, XCVM developers effectively overcome the prevalent issues of fragmented liquidity that plague bridging current solutions.

For example, through Centauri, users would be able to transfer assets from the Cosmos ecosystem to our Kusama parachain (Picasso) via the ICS-20 standard. What this means is that all tokens bridged from the Cosmos ecosystem would have a standardized representation. This contrasts with the approach current bridges employ, where different bridges may have different representations of their bridged assets (ex bridge-aETH vs bridge-bETH).

Cross-chain lending

Angular Finance takes the familiar functionality of money markets cross-chain. This allows developers to perform lending and borrowing across ecosystems. As a pallet in the Picasso runtime, developers can build increasingly complex applications on top of Angular, such as:

  • Providing leverage on interest-bearing assets
  • Leveraged trading
  • Options
  • Derivatives

These applications, along with Angular’s functionality, can then be leveraged by developers building on the XCVM to simplify their development processes. Thus, instead of managing their own contracts across multiple ecosystems, developers can instead call into Angular via the XCVM.

Cross-chain liquid staking

With the increasing number of proof-of-stake (PoS) blockchains in the DeFi space, liquid staking has proven to be a sustainable solution to liquidity limitations caused by staking capital. For example, users can take a liquid staking derivative on a staked ATOM position on Cosmos and interact with this liquid staked position on a money market where it can be used as collateral for a loan on another chain.

Tooling and Other Use Cases

In addition to providing the core infrastructure required to facilitate these cross-chain applications, Composable is also actively developing tooling to make the process as seamless as possible. Some of this tooling is listed below in addition to other potential use cases for XCVM developers.

Cross-chain name service support

Composable aims to be the first to provide cross-chain and cross-layer name service support. Providing name service support on a single chain is relatively trivial. However, maintaining name services across different layers and chains poses new challenges. We would take care of the details such as key management, data synchronization and finality on different chains to make the process transparent for the end user. Therefore, no matter the network or the token, we would seek to support names and addresses indistinctly.

Name services help accomplish our vision of a less fragmented and more accessible blockchain space where a single interface allows us to leverage the composability of DeFi at large, unlocking its full potential and enabling new projects.

Cross-chain oracles and data analysis

As more blockchains connect through Centauri, the need for a cross-chain oracle is paramount. This is why Apollo is a core piece of our technology stack at Composable Finance. Apollo is an MEV-resistant oracle built as a pallet on our Kusama parachain, Picasso. As a result of Apollo’s connection to Centauri, XCVM developers will be able to pull data and prices from any IBC- enabled chain, layer, or application in a trustless manner.

Cross-chain leverage market using IBC and inter-chain accounts

Leverage or margin trading can be defined as borrowing capital to invest more significantly than otherwise. In DeFi, plenty of lending protocols allow users to acquire loans on their crypto assets. However, these loans are generally not capable of being deployed and used in various chains. The interest on crypto loans can also be a preventative factor that can negate the earnings from leveraging these loans.

Leverage trading increases earnings with exponential scale, and enabling cross-chain functionality would raise the total available funds to be earned. It would allow users to choose from a wider pool of yield-bearing protocols and dApps. Therefore, introducing a model for an all-in-one platform to resolve this unmet need would bring zero-interest crypto lending, loan deployment cross-chain, and funds management from a single framework. As a result, we can create a fully composable leverage market based on interchain accounts and the IBC. This has the potential to turn into a full-on cross-chain, cross-margin lending protocol that leverages sovereign blockchains while attaining interoperability.

Cross-chain protocol governance, including DAOs

Currently, cross-layer governance lacks the necessary infrastructure for protocol developers to leverage its potential. For example, if a protocol is deployed on two or multiple chains, Layer 2 voters on Ethereum have significant barriers to entry to participate in governance proposals. Token holders must bridge their tokens to the Layer 1 (L1) and compete with L1 voters to interact with governance proposal outcomes. This is disadvantageous for L2 voters who must take these additional steps, especially during time-sensitive governance voting scenarios. However, a protocol deployed on the XCVM would not have these barriers, despite interacting with several different chains.

Utilizing an XCVM smart contract for a DAO enables actors to interact with ecosystems beyond one single chain. An example of this can be shown by the creation of a cross-chain investment DAO that would be able to participate in ICOs and launchpads across different ecosystems such as Cosmos, Layer 2 scaling solutions and more from deploying on the XCVM.

Cross-chain metaverse, NFTs and gaming

The XCVM can provide the infrastructure required for a unified metaverse, opening up limitless opportunities such as onboarding NFT assets from multiple ecosystems into a single metaverse. With the XCVM, users could interact with metaverses across ecosystems and provide users with the ability to move their metaverse assets between different blockchains. This could enable users to transfer their NFTs to new blockchains, markets, and games as the space grows. XCVM developers have a unique opportunity to explore this space. One example of this could be the potential for a cross-metaverse exchange where users can trade resources from various games and metaverses on any chain connected with which the XCVM can interact.

Composing DeFi For Mass Adoption

Ultimately, by building with our XCVM, developers can tailor their experience to maximize the desired parameter while minimizing ecosystem-specific decision-making — all while architecting cross-chain native smart contracts and protocols.

Composable aims to maximize the efficiency of liquidity flow and abstract complexity for any service or application built on the XCVM. Composable’s modularly functional infrastructure and novel technology stack can enable a new class of dApps, revolutionizing ease of access and propelling them for mainstream adoption. The future of dApps built with XCVM abstracts away complexity whilst maintaining robustness across chains and layers to execute the user’s needs.

Legal Disclosures

©2022 Composable Finance, Ltd. All right reserved.

This information contains “forward-looking statements”. These statements, identified by words such as “plan,” “anticipate,” “believe,” “estimate,” “should,” “expect”, “will”, “can”, and similar future looking expressions include our expectations and objectives regarding our future operating results and business strategy. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Composable Finance Ltd. and its affiliated entities or related projects (“Composable”, or the “Company”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, general business, economic, competitive, political and social uncertainties; dependence on commercial product interest; as well as regulatory or legal changes and uncertainty. Forward looking statements are based on a number of material factors and assumptions such economic conditions in the near to medium future or the current or future state of a given technology. While the Company considers these facts and assumptions to be reasonably based on information currently available to it, these assumptions may prove to be incorrect. Actual results may vary from such forward-looking information for a variety of reasons, including but not limited to risks and uncertainties known and unknown by the Company. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. The Company’s actual results and conditions may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements.

This information does not constitute an offer to sell or a solicitation of an offer to purchase securities, financial services, investment products or investment advice by the Company. Such an offer can only be done through a registered or licensed offering or entity or subject to an exemption or applicable exclusion. The recipient should not rely upon anything within this information in making a decision to invest in the Company, purchase tokens offered by the Company or to utilize the Company’s technology. The Company is not required to update the information provided and the information is only current as of the date of its release and is subject to change over time. To the extent the information being provided is provided by an individual, it is provided solely by that individual and is not necessarily being provided by the Company.

Use cases are provided for illustration purposes only and the Company neither supports nor condones any such uses. Any such uses should be done at the risk of the person making the utilization of the technology and any user agrees to hold harmless and indemnify the Company from and against any losses that may occur as a result of any such uses.

The Company is not liable for any possible claim for damages arising from any decision any person makes based on the information made available to through this document. By providing information through this document, the Company is neither recommending the purchase or sale of financial instruments, technology or assets issued or provided by the Company or any affiliated company or project. Nor is the Company endorsing services provided by any organization. Any loans or investments made in digital assets or related technologies are subject to significant risks of losses and past performance is no guarantee of future results.

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0xbrainjar

0xbrainjar

Composable Finance Founder & CEO. I write about R&D at Composable Finance. Physicist by training