Published: April 15, 2024
As more chains enter the market and their ecosystems hit critical mass, liquidity and efficient cross-chain operations are paramount. Besides Thorchain and Maya, this sector is still far from reaching its full potential, for which competition is necessary. Chainflip addresses this critical gap in the market with a protocol that enables trustless swaps of native assets across different chains (e.g. from $ETH to $BTC). These direct swaps take place without going through intermediaries, relying on bridges, or using wrapped assets. Instead, the protocol operates as a cross-chain AMM based on a Proof of Stake (PoS) validator network.
Recently exiting beta, Chainflip has demonstrated significant traction, showing a rise in swap volumes even absent incentives—indicative of robust product-market fit. The protocol’s growth strategy includes expanding integrations with wallets and marketplaces, adding support for more chains, and enhancing capital efficiency through features like the Just-In-Time (JIT) Automated Market Maker (AMM). Together, this creates a positive feedback loop where increasing volume results in more fee generation and value accrual for the $FLIP token due to the use of a buyback-and-burn mechanism.
Chainflip operates with limited competition, mainly from Thorchain, which it complements rather than directly competes with. While Thorchain uses $RUNE for economic security, Chainflip uses $USDC as the base asset. With a market cap significantly lower than Thorchain’s, we expect Chainflip to grow in market share as both protocols complement each other. This oligopoly results in a diversity of alternatives to move assets from one chain to another, making the market more efficient overall.
Our thesis on Chainflip stems from the presumption that, as more chains and integrations result in increasing volume and, therefore, the amount of $FLIP tokens being burnt, the actual market cap rises by multiples from the current $100M in market cap and $425M FDV. For comparison, $RUNE’s market cap is $2.3B and the FDV is $2.9B.
Trading volume is already making all-time highs on a daily basis, but the price has been following a divergent path in the past 30 days, down ~40% from the local top. Acknowledging the reasons behind this dynamic is a core building block of our invalidations, which stem from a suboptimal token distribution that might hinder price appreciation or accentuate downward price action during market corrections.
Chainflip, under the leadership of founder Simon Harman, has been in development for nearly four years. The whitepaper, released in 2020, has recently culminated in a mainnet launch on March 11th, 2024, with the team growing to over 35 contributors since inception.
Fundraising efforts commenced in late 2020 and finalized in February 2021 securing approximately $3.8M at a $15M valuation, led by Blockchain Capital and other notable names like Mechanism Capital and CMS Holdings. A subsequent major round in August 2021 raised $5.80M at a $45M valuation, spearheaded by Framework and Coinbase Ventures, among others including Delphi and MetaCartel.
Next up, an equity round gathered $10M at a $45M equity valuation, implying a $120M token valuation with contributions from Pantera Capital, Framework Ventures, and Blockchain Capital. Unlike previous token rounds, these investors commit for 5 years and can redeem their shares for a share of the treasury, instead of a direct token warrant.
Additionally, a public sale via Coinlist in August and September 2023 allowed users to purchase $3.78M worth of tokens, broadening the investor base and market participation. This implied an average valuation of $164.7M, which is more than 2.5x lower than the current $425M FDV.
Together, this represents a total capital raise of $23.3M, with the exact details outlined in the table below:
Chainflip’s mission is to facilitate seamless and decentralized cross-chain swaps, eliminating the reliance on bridges and wrapped tokens that may introduce tail risks or result in liquidity fragmentation.
The protocol operates through a cross-chain Automated Market Maker (AMM) integrated into a Proof of Stake (PoS) validator network. Validators operate Vaults that store assets across multiple chains, while the trading process is managed through Chainflip’s State Chain, which takes care of the swapping and asset transfer logic.
At the heart of Chainflip is the Just-In-Time (JIT) Automated Market Maker (AMM), which enhances capital efficiency and pricing accuracy by preventing front-running and ensuring minimal slippage. Unlike traditional AMMs like Uniswap, Chainflip’s JIT AMM does not hold funds in on-chain pools. Instead, it operates virtually, mimicking the operation of centralized exchanges (CEXs) where all deposits are stored in a unified wallet system with individual user balances managed separately.
Similar to how $RUNE is paired with all assets in Thorchain pools, $USDC is utilized as the primary collateral and base asset across all liquidity pools within Chainflip. This choice reduces liquidity fragmentation and enhances market stability, enabling easier addition of new assets and more effective impermanent loss management by market makers.
Selecting $USDC as the base asset aligns with its high liquidity and widespread adoption in DeFi compared to alternatives like $USDT, which lacks some operational features like Circle’s Cross Chain Transfer Protocol (CCTP) and does not meet the ERC20 standard.
This design choice doesn’t diminish the role or utility of $FLIP, and it can even be argued that it reduces endogenous risk. The $FLIP token is actually integral to the ecosystem, and benefits from supply dynamics where transaction fees are used to purchase and burn $FLIP, potentially leading to a deflationary supply model.
Even though $FLIP is an ERC-20 token deployed on Ethereum for ease of use and composability, it can be staked on the Ethereum State Chain Gateway contract, which loads those tokens onto the Chainflip State Chain for use in the appchain environment. Thunderhead Labs is the leading liquid staking provider, offering ~14% APR with a daily rebase, 22% commission on rewards, and currently making new highs in the amount of tokens deposited.
The economic mechanism of $FLIP, which takes inspiration from Ethereum’s EIP-1559, aims to find a balance between validator rewards and offering an incentive for holders to benefit from network activity. Hence, $FLIP features an elastic supply where minting and burning play an important role. While validators receive network emissions from block rewards, this inflation is offset by automatically converting a portion of the network fees collected in USD into $FLIP, and then burning it automatically within the protocol. Therefore, even if you don’t use the token to stake, there are still potential benefits in holding $FLIP.
Centralized exchanges (CEXs) have long dominated cross-chain transactions, hindering the adoption of diverse blockchains and non-custodial wallets for DeFi, NFTs, and other applications. Although platforms like Uniswap have brought innovation within the Ethereum ecosystem, the lack of similar decentralized solutions across other blockchains has constrained ecosystem growth. Emerging cross-chain solutions like Chainflip aim to address these gaps but face challenges such as complexity, centralization, reliance on synthetic assets, and user experience issues like high slippage and pricing inaccuracies.
We should put resources toward a proper (trustless, serverless, maximally Uniswap-like UX) ETH <-> BTC decentralized exchange. It’s embarrassing that we still can’t easily move between the two largest crypto ecosystems trustlessly.
— vitalik.eth (@VitalikButerin) March 24, 2020
Source: Vitalik on X
Chainflip is positioned to overcome these challenges by offering a universal, decentralized swapping solution that is agnostic to wallets and blockchains. Through simple RPC calls and SDK integrations, it simplifies cross-chain transactions by eliminating the need for synthetic or wrapped assets, reducing on-chain computations, and thereby lowering transaction costs.
Looking beyond individual projects that aim to rival the dominance of CEXs for cross-chain swaps, the sector’s evolution involves moving towards active liquidity management and intent-based systems, where user demands drive competitive pricing. Despite Thorchain’s current market dominance of over 95%, the potential market for cross-chain decentralized exchanges is vast and expected to continue growing over time, suggesting ample growth opportunities for platforms like Chainflip. It is not about Chainflip and Thorchain competing for a $2B pie, but rather about joining forces to compete against CEXs for a $100B pie.
At the moment, Chainflip’s roadmap emphasizes extending chain support and wallet integrations, improving both the reach and functionality of the protocol. The short-term focus lies on adding major chains like Solana and Arbitrum, as well as integrating with popular wallets and cross-chain aggregators. For now, only Bitcoin, Ethereum, and Polkadot are supported.
The major brokers include THORSwap, THORWallet, Bitget Wallet, SubWallet, Squid Router, Axelar, swappy.be (swaps from Discord), BlockSwapBot (swaps from Telegram), El Dorado, Houdini Swap, and DeFiSpot. Moving forward, the priority is to integrate Chainflip into Shapeshift as well as other major wallet providers like TrustWallet, Metamask, and Ledger.
The next major milestone for Chainflip is the implementation of Cross-Chain Execution support. This advancement builds upon the protocol’s existing Cross-Chain Messaging (CCM) capabilities, enabling developers to utilize the validator network to execute arbitrary code across different blockchains. This functionality will significantly enhance automation and allow for more complex cross-chain interactions that go beyond the current capabilities of existing messaging protocols. By doing so, Chainflip will expand its utility beyond simple asset swaps, facilitating a range of decentralized applications and operations.
The core thesis is that we will live in a multichain world where the demand for secure, efficient, and censorship-resistant cross-chain swaps is accelerating. As regulatory pressures increase globally, decentralized exchanges (DEXes) are capturing volume from centralized exchanges (CEXs) by offering sovereign and permissionless transactions that cannot be censored.
Chainflip is consistently breaking all-time highs in daily trading volumes, signaling robust and growing demand. This sustained increase is evident across various metrics—from weekly and monthly volume rises to the growth in the number of unique swaps, token holders, and active stakers. Such metrics underscore Chainflip’s compelling market fit and operational success even in the absence of airdrop expectations, a points system, or token incentives.
Each swap incurs a small fee, part of which is used to purchase and burn $FLIP tokens, thereby reducing supply and directly impacting the perception of the token’s value. This mechanism aligns with our investment philosophy that prioritizes buybacks and burns over traditional yield-sharing, as it creates continuous buying pressure and reduces supply, making the asset more attractive to both current investors and potential new entrants.
This explains why adding more chains and being supported across major wallet providers is so important. These expansions grow the Total Addressable Market (TAM) and enable Chainflip to tap into a larger volume of cross-chain transactions. More chains and integrations drive more volume, which increases the amount of fees being captured by the protocol and, therefore, the burn rate of $FLIP, reducing the supply and creating deflationary pressure.
While $FLIP is currently available on exchanges such as Crypto.com, Kucoin, and Bybit, there is significant potential for growth through future listings. As Chainflip continues to gain adoption, the inclusion of $FLIP on major exchanges like Coinbase (note that Coinbase Ventures is an investor), Kraken, Upbit, or Binance could serve as a key catalyst. These listings would not only enhance the token’s visibility but also substantially increase its accessibility to a broader investor base. The introduction of $FLIP to perpetual futures markets could further amplify demand, positioning $FLIP to capture heightened interest and trading volume, thereby enhancing its market presence.
Overall, a cumulative amount of 36,58M $FLIP tokens (more than one-third of the original 90M supply) were sold to realize a total capital raise of $23.3M. This is a significant amount of tokens that might be dumped on new buyers by early investors to realize a profit and settle multiples on their Return On Investment (ROI). In addition to that, we also need to consider the team allocation, which is almost 15% of the supply and follows a linear unlock.
The result is that $FLIP entered the market with slightly over 20% of the total supply in circulation. The first impulse is to compare this with low-float and high-FDV tokens of the past cycle and extrapolate such conditions to the current setup. When the circulating supply is low relative to demand, the price can become artificially high, leading to an inflated FDV. This does not reflect the true market value and can be misleading to investors. Token recipients, aware of the inflated FDV, may anticipate a price correction and decide to sell, creating downward pressure on the token price as the market corrects for the supply-demand imbalance.
However, even though the current structure seemingly avoids the problems of schemes with a low float and high FDV, it is worth noting that many of the initially locked tokens will be and are entering the market relatively soon. Current linear unlocks will end in November, which amounts to approximately 36k tokens unlocking every day (claimed by the team and early investors; not necessarily sold).
For instance, strategic investors that participated in the early funding rounds before 2021 received 20% of their allocation unlocked at TGE and the remaining in a 365 days linear vesting. Looking up for Chainflip’s TokenVestingNoStaking contracts on Arkham we can detect instances of early investors sending funds to CEXs for presumably selling their allocation and lock-in large profits.
While it is necessary for a PoS network to have a broad token distribution to start operating, a significant portion of the supply becoming available in the early stages might delay or counterbalance the positive price action that might result from token burning. That being said, selling an early allocation would mean forfeiting future earning potential from staking rewards. In fact, a portion of this unlock directly goes to validators.
What’s pertinent is that with a daily unlock of almost 36k $FLIP at a price of $5 per $FLIP, the market absorbs approximately $189,584.88 worth of tokens each day. This flow represents the liquid supply that could potentially be sold.
Additionally, we will need to keep an eye on the November 2024 unlock, when 18.89M tokens will go to strategic investors and 3.2M tokens to the Oxen Foundation after a 1-year cliff. These big unlocks happening in a matter of months after launch are definitely a red flag that we should monitor. Even though there is room for short-term outperformance if $BTC approaches $100k, things start to change when the market dips and new tokens suddenly start hitting the market.
Accepting the vesting schedule as a known factor, the focus should be on the long-term potential of Chainflip, but trading it during trends when $BTC is outperforming. For $FLIP, the FDV and overall market conditions do matter. At the same time, short-term volatility should be weighed against a belief in the protocol’s success and the perceived valuation of $FLIP when considering its fully diluted valuation.
Delivering a robust protocol for cross-chain transactions is a huge endeavor. As the space matures and demands higher liquidity and interoperability, Chainflip stands out as a protocol with a unique value proposition that complements Thorchain’s capabilities. Currently, there is a big valuation gap between the two, even though both are tackling the same challenges.
Since exiting beta at the start of the year, the token has been on a downtrend that can be attributed to early investors selling their allocation. Even though not all token claims are necessarily sold on the open market, we must acknowledge this headwind. This might lead to underperformance even during a bull market, as early investors can realize multiples in profits from their early allocations years ago
As a project with natural demand and product-market fit in the absence of excess incentives, Chainflip is making strides to catch up to $RUNE’s valuation. The project’s roadmap promises to bolster this growth further through strategic wallet integrations and support for additional chains, all while reinforcing capital efficiency with its JIT AMM design.
Facing limited competition and with the use of $USDC as a base asset, Chainflip can reduce systemic risks while continuing to expand its trading volume. This is augmented by a buyback-and-burn mechanism that strengthens the intrinsic value of $FLIP, establishing a potential for deflationary supply dynamics that could be favorable for a long-term valuation.
All things considered, the key to Chainflip’s promise lies in its scalability and adaptability, with initiatives in place to extend its reach and deepen its market penetration. Aware of the vesting schedules and potential market movements, there is no cookie-cutter strategy that can be applied to perfectly time the market. As a rule of thumb, the key is to come up with a number for the FDV and trade along the overall market and $BTC price movements.
On-chain Market Making actions
Revelo Intel has never had a commercial relationship with Chainflip and this report was not paid for or commissioned in any way.
Members of the Revelo Intel team, including those directly involved in the analysis above, may have positions in the tokens discussed.
This content is provided for educational purposes only and does not constitute financial or investment advice. You should do your own research and only invest what you can afford to lose. Revelo Intel is a research platform and not an investment or financial advisor.
