Composable Finance
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Composable Finance

Unpacking the XCVM’s use-cases: aggregation, arbitrage, and institutional onboarding — Pt. 2

We have discussed earlier in our series that the XCVM will open up new opportunities for DeFi developers to create compelling use cases that appeal to both consumers and institutions. Furthermore, this will enable the development of novel cross-chain dApps across four major categories: aggregation, arbitrage, onboard ramps into DeFi, and new tooling. This piece will further demonstrate how Composable empowers DeFi aggregation, arbitrage, and institutional onboarding through the XCVM.

What could aggregation-centered dApps look like?

Defi’s value is largely derived from its diversity of chains and solutions. This diversity, however, also comes with downsides such as complexity and fragmentation of liquidity across siloed blockchain ecosystems. This often forces projects into a frame of zero-sum competition and does not allow users to gain the full utility of DeFi’s many chains and layers.

The XCVM is able to unify state transition functions across these chains and layers via satellite smart contracts in each respective ecosystem. Aggregation-based dApps are able to leverage this functionality to aggregate various opportunities not only within 1 ecosystem, as is already possible, but across DeFi at large. This means that XCVM developers will be able to provide their users with the best lending, borrowing, yield farming, and swap rates across all ecosystems connected to the XCVM.

Taking a cue from our CEO, 0xbrainjar’s original post, a developer could theoretically build a cross-chain yield optimizer that monitors liquidity pools across the; Cosmos, DotSama, and NEAR ecosystems. When the dApp finds a better opportunity it could then burn the LP, bridge to the new opportunity, and mint a new position. After setting their initial risk parameters this process could be entirely abstracted from the end user.

What is the cross-chain opportunity for arbitrage?

The various chains and ecosystems effectively function as different markets. Consequently, these siloed ‘markets’ often result in price discrepancies for the same asset across chains. Additionally, the fragmentation of liquidity that accompanies siloed blockchain environments makes these arbitrage opportunities from price discrepancies inaccessible or economically infeasible for end users to capture. As the XCVM unifies these different ecosystems, the ability for developers to build dApps that leverage these cross-chain arbitrage opportunities becomes a mainstay.

The most clear-cut example of cross-chain arbitrage would be the utilization of an oracle such as Apollo to identify mismatches in asset prices across a multitude of chains and DEXs. In essence, this would look very similar to the example given above, however, instead of monitoring for the best yield the dApp would be:

  1. Looking for price discrepancies
  2. Bridging to the ecosystem where an opportunity arises
  3. Performing a swap
  4. Bridging to the ecosystem with more favorable pricing
  5. Swapping again to realize the arbitrage opportunity

Overall, the ability for developers to build solutions that allow users to take advantage of cross-chain arbitrage opportunities will create more efficient markets across DeFi at large.

How could the XCVM lead to more institutions entering DeFi?

The XCVM abstracts complexity and provides unique opportunities to leverage the best of DeFi’s value. As such, the XCVM could enable the development of neo-banks that empower users to gain the benefits of staking and liquidity provision, and deploy asset strategies across chains.

For institutions who want to deploy large sums into DeFi, XCVM-based dApps could be used as portals. In addition, these dApps would benefit from Polkadot’s shared security advantage and will be reinforced by the Polkadot relay chain to handle high levels of throughput. Keeping in mind the aforementioned opportunities for cross-chain arbitrage, XCVM-based dApps thus represent secure yet high-yielding opportunities for institutions. In addition, the user experience of these dApps will be effective enough for them to be adopted by a wide audience.

The XCVM will open a new dimension of cross-chain innovation

As a whole, XCVM contracts represent a significant new frontier that could revolutionize DeFi as we know it. The introduction of solutions that can capture cross-chain aggregation and arbitrage opportunities will create more efficient markets that are more appealing to both retail and institutional investors.

In the final piece of our series, we will discuss how the XCVM enhances both the user and developer experience in the cross-chain future, stay tuned.

For more information about Composable and how it is architecting the unified DeFi landscape of the future and composing DeFi for mass adoption, check out our socials:

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