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Conflux Network

Redefining Cross-Chain Tokens With Kepler Protocol

Written by Conflux Network’s DeFi Analyst Sami Tannir

After a hectic summer for DeFi, we have seen the ecosystem expand from simple money legos working together to full-blown cross-chain yield aggregating money markets, originating from the craze of yield farming in June. Yield-farming, when done right, brings optimized utilization of liquidity locked into different protocols. This is done to achieve the highest return possible, while also getting users to acquire a token without going through the traditional route of exchange listings, or even purchasing the token.

As the craze for 5-figure APY rates cools down, the market has returned to a sense of assuredness. Looking at the daily transaction volume compared to the daily liquidity in Uniswap, we can analyze the liquidity utilization rate of the assets deposited in the exchange by liquidity providers. Figure 1 shows the progression of liquidity deposited that users are truly earning interest (transaction fees) on when assets are locked into an AMM exchange such as Uniswap.

Figure 1: From December 2–8 2020, Uniswap’s liquidity utilization rates averaged 26%.

Figure 1 shows that the most active exchange in the DeFi ecosystem has only been able to utilize ~26% of the total liquidity deposited. In the scope of the entire cryptocurrency ecosystem, decentralized finance has had liquidity scarcity problems since it first emerged. It is no secret that the health of DeFi is largely identical to the health of decentralized liquidity venues. With low liquidity utilization ratios, another burden is placed on top of the liquidity scarcity, DeFi can’t capitalize on the fraction of assets it has to work with. Yield-farming initially improved this situation to a certain extent. When Uniswap first created the UNI-V2 token, users who provided liquidity in Uniswap received a token representing their LP position and were able to deposit into various “farms” on the market. This enabled traders to not only receive LP income but also rewards from the respective farm they deposited their position in. Beyond the madness and drawbacks of this system, the utilization rate of locked assets was vastly improved. Decentralized exchange’s liquidity continues to grow, and new DeFi protocols are able to gain traffic and an easy route to multi-million dollar platforms.

The concept of yield-farming is now dominated by supply-side aggregators such as Harvest and Yearn, protocols living on top of the DeFi stack that provide smart contract constructions, enabling users to achieve high yield offered by other DeFi protocols. Users can deposit a single asset and leverage multiple underlying protocols incentive structures.

Figure 2: Simple interfaces with high-yield automated trading strategies for single assets like Harvest quickly took DeFi by storm, Harvest is currently the 10th largest protocol with ~$700M locked.

When supply-side aggregators appeared, they trumped most yield-farming projects by maximizing the efficiency of assets through complex automated trading strategies. However, the majority of UNI-V2 tokens are not supported in these supply-side aggregators such as Yearn and Harvest, especially the precious native asset and stablecoin liquidity locked inside DEXes. This means that after liquidity enters a decentralized exchange, it can not be invested in supply-side aggregators to earn income at the same time. This division of liquidity has led to the concept of the Kepler Protocol, which optimizes the LP utilization rate to upwards of 100% by using locked assets in both supply-side aggregation and transaction fee rewards in DEXes.

Kepler Protocol will be implemented on MoonSwap, an AMM DEX running on Conflux Network that provides instant transactions and zero gas trading for Ethereum users. After providing your initial ERC-20 liquidity on MoonSwap, traders will get an equivalent of their deposit on Conflux Network. Meanwhile, the assets stored on the original layer-1 will be invested in projects like Yearn, Harvest Finance, and Compound. This ensures that while traders are getting liquidity utilization on the LP position, they are also earning interest on the staked assets stored on the origin chain. This is the product design of the Kepler protocol, which can raise the liquidity utilization rate to higher than 100%.

What is ShuttleFlow?

A core component of the Kepler protocol is Conflux Network’s ShuttleFlow — the cross-chain asset protocol MoonSwap currently relies on. MoonSwap runs on the Conflux blockchain network which supports high-speed and zero gas trading of ERC-777 assets. ShuttleFlow comes into play when users want to convert their ERC-20 assets into ERC-777.

When ERC20 assets are transferred to Conflux, they are transferred to an Ethereum address assigned by the Cross-Chain Alliance. The original ERC20 assets will be deposited into a multi-signature contract in the custody of the Cross-Chain Alliance via ShuttleFlow. The Conflux address corresponding to the Ethereum address assigned by the Cross-Chain Alliance will receive the ERC777 “cToken” minted according to the ERC20 tokens at a ratio of 1:1, for example staking one $MKR on Ethereum would mint 1 $cMKR on Conflux pegged to the same price.

When withdrawing ERC-777 assets out of Conflux, back on to the original chain, users need to fill in the recipient address of the ERC-20 tokens and the ERC-777 cToken will be burnt by ShuttleFlow. The corresponding amount of ERC-20 assets will be sent to the recipient address from the multi-signature contract in the Cross-Chain Alliance’s custody via ShuttleFlow.

While ShuttleFlow may seem similar to other cross-chain asset bridges, the Kepler Protocol will optimize the concept by utilizing the ERC-20 assets in the multi-signature contract, which otherwise would not be obtainable until the equivalent ERC-777 cToken was burned. To achieve this, cTokens can be swapped into “mTokens” through the Kepler protocol.

mToken is an ERC777 asset, which can also enjoy the high-speed and zero gas DeFi experience provided by MoonSwap and other DApps on Conflux. Meanwhile, the ERC20 assets in the multi-signature contract of the Cross-Chain Alliance originally will now be sent into the Kepler Protocol, where a community governed system will invest the treasury into high-yield audited projects such as supply-side aggregators such as Yearn and Harvest, or lending protocols such as Compound and AAVE.

Read more about ShuttleFlow here.

Introducing Kepler Protocol

What was once considered a disadvantage of connectivity between Layer 1 and Layer 2 assets now becomes a strength using the interoperability of DeFi money legos. The process behind Kepler is based on users migrating Ethereum native assets to cross-chain Conflux assets. Now, beyond traditional cross-chain asset wrapping with cToken, traders can generate mTokens which will gain additional interest by being invested in asset management platforms on the origin chain. The mToken standard can be used just as freely as the cToken, whether it is moving between platforms, trading, or becoming an LP in MoonSwap’s liquidity mining pool.

ERC-20 assets will be invested in Ethereum-based asset management protocols. The rewards gained will be returned to the MoonSwap ecosystem in the form of mToken and distributed to the traders who minted the mToken. mTokens can be exchanged back to cToken at any time, and the whole process will be fully executed by smart contracts without any third-party involvement. The mToken standard is currently in development and set for an audit before launch.

Collaboration Outlooks

The biggest charm of blockchain lies in its permissionless nature and the composability of DeFi. The future of Kepler could bridge protocols with other asset management protocols on Ethereum in a permissionless, community-driven manner. MoonSwap is ready to move forward on the implementation of the bridge and is in active development with the Harvest team to become the first asset management platform of mToken liquidity.

If you are an Ethereum protocol interested in joining the next-generation of cross-chain assets with Kepler Protocol or exploring cross-chain experimentation deployments please email us at grants@conflux-network.org to learn more about our new grants program that allocates up to $50,000 to DeFi projects bootstrapping experimentation on Conflux Network.

About Conflux Network

The only state endorsed public, permissionless blockchain project in China, Conflux Network is an open-source, layer-1 blockchain protocol delivering heightened scalability, security, and extensibility for the next generation of open commerce, decentralized applications, financial services, and Web 3.0. Conflux Network is overseen by a global team of world-class engineers and innovative computer scientists, led by Turing Award recipient Dr. Andrew Yao. Fostering entrepreneurship and innovation, Conflux elevates startups and organizations across industries and continents to generate decentralized marketplaces and digital assets for meaningful business and social impact. Founded in 2018, Conflux has raised $35 million in capital from prominent investors including Sequoia China, Metastable, Baidu Ventures, F2Pool, Huobi, IMO Ventures, and the Shanghai Municipal Science and Technology Commission.

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Conflux Network

Conflux Network

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Conflux is a PoW + PoS hybrid first layer consensus blockchain for dApps that require speed at scale, without sacrificing decentralization.