Ecosystem

What Problem Does Connext Solve?

Learn more about the central problem Connext solves

The Central Problem

Lack of Trustless Cross-Chain Interoperability

The present blockchain landscape consists of siloed decentralized systems that are characterized by their lack of cross-chain interoperability. Let’s have a closer look at the problem Connext seeks to solve…

Understanding the Problem

Lack of Trustless Interoperability

In our introduction to Connext, we’ve learned that a multitude of new blockchain ecosystems have started to emerge over the course of the last years. Along with these new ecosystems came a variety of new use cases for distributed ledger technologies, such as decentralized finance (DeFi) and Non-Fungible-Tokens (NFTs).

Despite their attractive use cases, the rich features of the various blockchain ecosystems are usually only accessible for the holders of the ecosystem’s native token. This limits cross-chain communication and makes it expensive to switch between ecosystems. It also prevents large parts of the blockchain space from accessing the features of individual ecosystems in a seamless, trustless, and easy manner.

As a result, less savy participants and large institutins alike may not be able to access various use cases of blockchains, such as DeFi dApps – which in turn limits growth of the entire sector. Similarly, developers are not able to build applications that are accessible from different blockchain ecosystems as they are unable to utilize the features of cross-chain communication.

The Results of Siloed Decentralized Systems

Growth Limitations of the Ecosystem 

Less crypto-savy individuals are unable to access various features and applications of the blockchain ecosystem

Limited Cross-Chain Communication

dApps cannot communicate across multiple blockchains, which limits their use cases 

Lack of Chain-Agnosticism

Developers are unable to provide their dApps to the blockchain ecosystem at large but are limited to individual ecosystems

Understanding Interoperability

Problem Illustration

The challenge the blockchain ecosystem is presently confronted with

Providing Liquidity – An Example

Illustrating the Problems of a Lack of Cross-Chain Interoperability

To illustrate the problem Connext seeks to solve, let’s have a look at a hypothetical scenario that helps us to better understand the challenges the ecosystem is presently confronted with.

The example will revolve around providing liquidity, so let’s have a quick recap what this is:

Definition: A liquidity provider lends their crypto assets to support the decentralized trading of assets on a decentralized exchange. In return, the liquidity provider is rewarded with a share of the trading fees generated on the platform.

We can now have a look at the scenario we’re going to use to illustrate the problem:

Scenario: Let’s assume a LINK holder wishes to provide liquidity on Uniswap’s ETH/USDC trading pair to earn a portion of the generated trading fees.

Breaking Down the Process Into its Components

We can better understand the complexity of the process by separating it into its components.

First of all, we know that the user is holding LINK on the Ethereum blockchain. Uniswap is a dApp that runs on the Ethereum blockchain as well. For this reason, our user needs ETH – the native token of the Ethereum blockchain – in order to provide liquidity on Uniswap. USDC is a stablecoin running on Ethereum as an ERC20 token.

In summary, three coins/tokens, and one dApp are involved in this process:

1 Ecosystem

Ethereum

3 Coins/Tokens

LINK, ETH, and USDC

1 dApp

Uniswap

The Present Process of Providing Liquidity

With this in mind, we can now have a look at how the present process of providing liquidity looks like for our BTC holder.

  • First of all, our user needs to swap some of their LINK for ETH and USDC. Naturally, this is going to result in trading fees and possibly transaction costs – depending on the platform they use.
  • Once the user has acquired ETH and USDC, they need to move it to a wallet that can connect to Uniswap. Presently, Uniswap supports MetaMask, WalletConnect, Coinbase Wallet, Fortmatic, and Portis. As a result, the user has to pay transaction costs if they need to move their tokens to one of these wallets.

  • Once connected to Uniswap, the user can finally provide liquidity. But the amalgamation of trading fees and transaction costs doesn’t stop here. Quite the contrary, Uniswap charges a 0.30% fee on all trades – only stable coin pairs (such as ETH/USDC) have a lower fee rate of 0.05%. Once the user clicks the “Add Liquidity” button on Uniswap, they need to approve a transaction through their wallet. This will incur another transaction fee.

  • Once the user wishes to stop providing liquidity, they need to pay another transaction fee to remove liquidity.

In the worst case, the user needs to pay transaction costs for a total of four transactions. On top of that, the user pays trading fees and platform fees. Even from this limited example, we can see that many applications of blockchain and DeFi are presently limited because of a lack of secure, low-cost, and trustless interoperability.

The Future of Providing Liquidity

Liquidity Provisioning in an Interoperable System

Next, we can take a closer look at the very same process in the interoperable future that Connext envisions. Let’s have a look how liquidity provisioning in an interoperable system could look like one day.

The Future Process of Providing Liquidity

  • One day, future LINK holders will hold their LINK within a wallet that allows them to seamlessly swap LINK to USDC and provide liquidity right through their wallets – all without ever needing to pay transaction fees.

When looking at providing liquidity in the present and in the future, we can see the big impact Connext can have on a variety of use cases, ranging from simple asset transfers to powering complex DeFi contracts with no transaction fees.

Ecosystem

Introduction to the Connext nxtp