Aug 35 mins read

Sifchain: Enhancing Efficiency in the Decentralized Finance Space

Full-chain solution for DEX with cross-chain implementation and liquidity pools

Sifchain: Enhancing Efficiency in the Decentralized Finance Space

Ethereum logo

The soaring price of Ethereum is causing frustration for users of decentralized finance (DeFi) due to high gas fees and limited network speed. Despite this, the DeFi sector has rapidly developed in recent times with the emergence of AMM DEX (decentralized exchanges with automated market making) and the increase in trading volume. However, due to performance limitations caused by interlocking blockchains, there is a need for a solution to enhance efficiency.

Sifchain logo

Sifchain is a full-chain solution for DEX aiming to reduce costs and increase processing power. Sifchain will integrate with 20-25 public chains, such as Ethereum and Stellar, by simplifying the integration process, reducing costs for funding and development resources, and supporting cross-chain communication protocol (IBC). This improvement is possible through the use of Tendermint consensus algorithm, with high throughput and scalability.

Currently, cross-chain solutions in the market can be categorized into notary, hash-locking, sidechain/relay, decentralized private key control, and notary mechanism+sidechain hybrid technologies.

Through Sifchain, DeFi users will experience lower costs and faster transaction speeds, which will encourage further growth and development in the sector.

AMM DEX screenshot

Image source: Medium

Sifchain Cross-Chain Implementation

Sifchain utilizes a "validator mechanism + sidechain mixed technology" approach for cross-chain implementation. This allows for the transfer of assets across different blockchain networks.

Within the Cosmos network, each source chain that wants to transfer assets across chains will have a specified peg zone with its own validator that is separate from Sifchain.

Cosmos Network

Sifchain can verify transactions through the linked zone validator using the Interoperability Protocol (IBC) cross-chain protocol.

To transfer tokens from a source chain to the linked chain, users need to send the tokens to a locking group on the source chain, generating a locking event. Sifchain then creates and mints new wrapped tokens (cBTC) as equivalent to the source tokens. Users can hold these wrapped tokens and burn them to retrieve the source tokens.

Token transfer process

Sifchain also offers a mixed Constant Function Market Maker (CLP) model for trading which supports limit and market orders, including stop-limit and take-profit orders, as well as margin trading.

CLP model

Increasing Earnings with Sifchain Liquidity Pools

Users can use Sifchain's liquidity pools to long or short cryptocurrencies and increase their earnings, similar to competitors like Uniswap. Here's how it works.

Asymmetric Liquidity Pooling

With Sifchain, liquidity can be added asymmetrically, meaning users can add only one or two assets from the trading pairs. In contrast, Uniswap requires users to add an equal amount of settlement tokens and other tokens.

For example, Rowan and an external asset such as ETH/ROWAN will be included in each pool. Sifchain also supports external asset trading pairs, but these trades require two exchanges between different liquidity pools.

Price Calculation and Processing

The internal price for USDC/BTC is calculated using the CLP price for USDC/ROWAN and ROWAN/BTC. When a trader places a market order, it is executed directly against the CLP.

When a trader places a limit order, it is executed only when the internal asset price of Sifchain moves within the range of the limit order. Sifchain prioritizes limit orders based on the number of outstanding orders, not the time or price requested.

Maintaining Accurate Asset Prices

The CLP price changes when converting liquidity pools, and if the price deviates significantly from the market's fair price, it provides arbitrage opportunities for market makers. Through this mechanism, CLP helps maintain accurate asset prices.

Additionally, traders can borrow funds from CLP for margin trading, but must use borrowed funds as collateral.

Using Sifchain for Long-term Strategies

In the long run, Sifchain's internal asset price changes less, and the oracle's price also comes from top exchanges. Between the two, they stay synchronized and there is no interference gap.

If a transaction is made without using margin, the purchased tokens are directly deposited into the trader's account.

Image of Sifchain Liquidity Pools Sifchain Liquidity Pools

Image of Margin Trading on Sifchain Margin Trading on Sifchain

Margin Trades

If margin is used, the purchased tokens will be held by the protocol holder. If a trader wants to close their position, they must sell all assets purchased, and the system will perform a settlement. After repaying the loan funds, the replicated collateral will be returned to the user. However, if the price falls below the settlement threshold, the system will directly settle the position.

Rowan Governance Token

The governance token of Sifchain is Rowan, which is allocated by the protocol to validators as a "blockchain reward," and validators stake Rowan to participate in network consensus. At the same time, Rowan is also the governance token of SifDAO. After the mainnet is launched, all protocol changes will be voted on by Rowan holders, with voting weight proportional to the amount of tokens held.

Creating a new CLP

Traders must buy Rowan directly or indirectly to execute trades on the CLP and ensure demand for the tokens. Specifically, anyone can create a new CLP by pooling Rowan and new tokens, with the price of the new token set based on the number of Rowan in the pool.

Cross-Chain Integration

Sifchain founder Jazear Brooks stated in a recent interview that Sifchain aims to become a decentralized autonomous organization (DAO). For example, future margin trades, loan rates, and related standards will be set by on-chain governance, and the Sifchain team cannot provide any setting indicators. Brooks added that "Sifchain is committed to building cross-chain integration as a basic infrastructure in the cryptocurrency world, similar to wallets and blockchain browsers, allowing the flow of all cryptocurrencies to be accessed on-chain, allowing decentralized organizations (DAOs) to coordinate the deployment of funds for all cryptocurrencies."