Swapping Basics

Chainflip swaps are fire-and-forget, meaning once a deposit is made, users don't need to do anything else for the swap to take place.

In a nutshell, the swapping process starts when a deposit is made to the State Chain through a process called Ingress.

The State Chain is an application-specific blockchain designed for the Chainflip protocol, making cross-chain swap transactions efficient. Whenever funds are deposited, the State Chain witnesses the deposit, where they are bundled and processed to be swapped in the Just-In-Time AMM protocol — all in the same block.

Once the funds are swapped, the new assets are ready to be sent to the destination address by a process called Egress.

Example: USDC (Ethereum) to BTC (Bitcoin)

Essentially, the process of JIT swaps on Chainflip looks like this for a user:

1. A user initiates a swap by depositing 10,000 USDC to buy BTC. The deposit is made through a swap Deposit Channel linked to their BTC address.
2. Market Makers monitor the Ethereum blockchain for the deposit and anticipate its execution on the Chainflip State Chain.
3. After 7 Ethereum blocks, the deposit transaction is considered final in the State Chain, and is expected to be executed in about 48 seconds (8 Chainflip State Chain blocks).
4. Market Makers now must include any limit or range order updates to compete for the trade on the BTC-USDC pool. They use risk model calculations and their capital on other exchanges to determine their best possible price for the trade.
5. The swap deposit reaches the witness threshold and is executed. The swap consumes some range orders before the pool price matches the next best limit order.
6. The Chainflip Validator network sends the swapped BTC funds to the user's native BTC wallet address.

Example: BTC (Bitcoin) to ETH (Ethereum)

The process is almost identical to the previous example, but in this case, there are two pools involved:

1. A user initiates a swap by depositing 1 BTC to buy ETH. The deposit is made through a swap Deposit Channel linked to their ETH address.
2. Market Makers monitor the Bitcoin blockchain for the deposit and anticipate its execution on the Chainflip State Chain.
3. After 3 Bitcoin blocks (~30 minutes), the deposit transaction is considered final in the State Chain, it is expected to be executed in about 48 seconds (8 Chainflip State Chain blocks).
4. Market Makers now must include any limit or range order updates to compete for the trade on the BTC-USDC and ETH-USDC pools. They use risk model calculations and their capital on other exchanges to determine their best possible price for the trade.
5. When a swap route requires multiple swaps through pools, each swap is conducted sequentially, usually in the same block.
6. The swap deposit reaches the witness threshold and is executed. Each swap consumes some range orders before the pool price matches the next best limit order.
7. The Chainflip Validator network sends the swapped ETH funds to the user's ETH wallet address at the end.

Minimum accepted price: Slippage protection

Chainflip allows to set a minimum accepted price for a swap deposit channel. This allows to protect users against price changes between a quote and the execution of a swap (also known as slippage protection).

When specifying a minimum accepted price, the protocol also requires a refund address and a retry duration (or swap deadline). A retry duration is the time window (measured in blocks) during which a swap must be executed before the deposit is refunded to the refund address.

If a swap is triggered through a deposit channel with a minimum accepted price, the Chainflip protocol will only swap the deposited assets if the available liquidity leads to a price that is equal or better than the specified minimum price. If this is not possible within the specified retry duration, the deposited assets will be refunded to the specified refund address on the source chain.

Minimum accepted prices are enforced on the AMM level and do not take deposit fees and broadcast fees into account. If a deposit is refunded, the Chainflip protocol deducts a deposit fee and a broadcast fee from the refund amount to pay for the transactions sent by the protocol.

Dollar Cost Average (DCA): Improving price

Any swap can be broken down into smaller "chunks" which are executed over time. This results in longer execution time, but reduces certain risks for LPs which should translate into better pricing for the end user. The chunks are executed according to DCA parameters, which can be set upon opening a deposit channel, and include the number of chunks and the interval between their execution.

If slippage protection is enabled, the minimum price requirement is applied to each individual chunk. If a chunk is executed, but does not meet the minimum price requirement, it is retried a few blocks later, pushing back the execution of any remaining chunks. If the same chunk reaches its retry limit, it will be refunded along with any remaining chunks in a single transaction to the user specified refund address. In that case, any amount successfully swapped in prior chunks is still sent to the user-specified destination address.

Example 1: Successful DCA swap

1. A user initiates a swap by depositing 5 BTC to get USDC with a minimum accepted price of 50,000 USDC/BTC. The channel's DCA parameters have been set to split the swap into 5 chunks with an interval of 2 blocks between them.
2. The deposit is witnessed at state chain block 100. The first chunk of 1 BTC is scheduled for execution at block 102 (small initial delay allows LPs update their orders for the first chunk).
3. At block 102 the chunk is executed with the output of 50,100 USDC, which is within the price limit. According to DCA parameters, the second chunk is scheduled for execution 2 blocks later, at block 104.
4. At block 104 the second chunk is executed at a price of 49,900 USDC, which is below the limit, and the swap is reverted. According to slippage protection parameters the chunk is to be retried a few times before the swap is refunded, with the first atttempt scheduled for block 109.
5. At block 109 the second chunk is retried, and this time gives the user the price of 50,070 USDC, which is within the limit.
6. The remaining chunks are also executed successfully at blocks 111, 113, and 115 resulting in 50020 USDC, 50010 USDC, and 50000 USDC respectively.
7. The total output of the swap is 250,200 USDC which is sent to the user's USDC wallet address.

Example 2: DCA with partial refund

1. A user initiates a swap by depositing 5 BTC to get USDC with a minimum accepted price of 50,000 USDC/BTC. The channel's DCA parameters have been set to split the swap into 5 chunks with an interval of 2 blocks between them.
2. The deposit is witnessed at state chain block 100. The first chunk of 1 BTC is scheduled for execution at block 102.
3. At block 102 the chunk is executed with the output of 50,100 USDC, which is within the price limit. According to DCA parameters, the second chunk is scheduled for execution 2 blocks later, at block 104.
4. As in the example above, the second chunk fails at block 104 and is retried at block 109. This time, however, the retry also fails, and the swap is aborted (to keep the example simple we assume only one retry is allowed). As a result, the amount of 50100 USDC from the successfully executed chunks is sent to the user's destination USDC wallet address. The remaining 4 BTC is refunded to the user's refund BTC wallet address.

USDC as an intermediate asset

It's important to note how Chainflip uses USD as the default pairing for all liquidity pools, with USDC (ERC20) as collateral. This design choice optimizes pricing while reducing liquidity fragmentation and aggregates slippage. USDC is chosen as the primary stablecoin base asset due to its high liquidity, adoption in DeFi, and secure structure compared to other options like USDT and algorithmic-stablecoins.

Learn more about the need of a common pair and the role of USDC in Chainflip's AMM.