A bridge and DEX aggregator, LiFi wants to be at the mere center of DeFi

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Simply put, LiFi is a bridge aggregation protocol for EVM-compatible chains. We live in a multi-blockchain world and, for that very reason, bridges between those different systems are a crucial part of the infrastructure. LiFi aims to be a gateway to all of the bridges and swap services out there. The crypto community needs to move assets across countless chain combinations, so the service aggregates all bridges, DEXs, and DEX aggregators to make that possible. Some have described Li.Fi. as “like 1inch, Matcha, or Paraswap, but for bridges.” 

The service automatically finds the best routes across EVM-compatible chains, using bridges, exchanges, and DEX aggregators. The system allows both split and batch transactions. The LiFi team laid out its vision for the future in this blog post: “The blockchain ecosystem is becoming multi-chain, liquidity is fragmenting, and even given any power law, we believe there will be plenty of relevant blockchains around.” That’s what they’re betting on. Fragmenting liquidity is one of the problems they’re trying to solve.

To help foster that future they created LiFi, a bridge and DEX aggregator that comes with a DEX for token-swapping at both ends, in each participating blockchain. Not only that, but developers can use LiFI’s API to integrate its services into their respective applications. In the previously linked blog post, the company further explains its product. “We abstract all the complexities of bridging/ swapping/ transferring assets and bring it all together as a data mesh of cross-chain liquidity sources in one SDK that can power any cross-chain strategy.”

As for the hard data, in this blog post, the company claims, “LI.FI has aggregated 9 bridges across 15 EVM compatible chains, along with all available DEX aggregators & DEXs on those chains, into a single solution.” The existing bridges and swapping sites generally suffer from low liquidity, which translates into non-satisfactory experiences for users. And that’s not counting those protocols we won’t even name that frequently go down, staining and stunning the whole industry. 

Projects like LiFi simplify the still complicated multi-blockchain ecosystem. If the objective is to onboard a billion people into crypto, this project is crucial infrastructure. However, cross-chain bridges and swaps are synonyms for counterparty risk. Bridges were the victims in DeFi’s three most costly hacks. As an example, just in March 2022, someone exploited the swap function on a LiFi smart contract and stole about $600K in various tokens. They’re a honey pot in the mere center of the chaos. There are no guarantees that it won’t happen again. 

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The problem LiFi solves

As Ethereum’s document on bridges puts it:

“Bridges offer a way for isolated blockchain environments to connect with each other. They establish a transportation route between blockchains where tokens, messages, arbitrary data, and even smart contract calls can be transferred from one chain to another.”

The current system works, but it’s inefficient. For each pair of assets, each DEX runs identical liquidity pools in each blockchain. Those pools are independent of each other, in fact, they practically exist in different worlds. Current cross-chain bridges only support a limited number of assets, all in one of the two blockchains it connects. To trade assets with another chain is not as easy as it sounds, because the demand isn’t always there to fill your orders.

That’s where the cross-chain bridges and DEXes aggregators come in. They connect different blockchains, integrate their data, and combine their pools of liquidity. That way, they make the whole system more efficient and robust. And the process is way simpler and straightforward. 

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How does LiFi work?

On the main page of its website, LiFi states its mission: “We believe Web3 needs to be made available for not only the next million users, but for the next million developers to build on it as well.” That adds a layer to their service. It’s not only for retail users, it’s also a middleware layer that programmers can cast and integrate into their dApps. By solving the cross-chain  problem for them, LiFi “allows developers to focus on their own value proposition.”

The system works as follows:

• Usually, bridges only support a limited amount of tokens. That’s why LiFi offers DEXes both on the source and destination blockchain. Before and after using the bridge, users can easily exchange tokens.
• The user wants to move value across chains and puts up a transaction request. 
• All of the bridges and DEXes have been previously evaluated. The system tested the security of their smart contracts and other possible systemic risks. 
• LiFi receives the request, evaluates the possible paths, and chooses the best, cheapest and safest bridge and/or swap.
• The system’s algorithm also analyzes the transaction’s formal characteristics before recommending the optimal path. 

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Important project characteristics

• In 2022, two leading companies audited the LiFi smart contracts. Code4rena in March and Quantstamp in April. 
• Everybody can audit said smart contracts, they’re open source. The API, however, is not. 
• Reportedly, the system possesses two kill switches. On the API level, it can make path calculations ignore bridges that pose risk. On the smart contract level, if the system feels it’s under attack, LiFi can completely stop the integration interface.
• According to Investopedia, slippage “refers to the difference between the expected price of a trade and the price at which the trade is executed.” LiFi provides a slippage setting that puts the user in the driver's seat. Depending on where that setting is, the system chooses the optimal path. 
• The LiFi team hosts two podcasts, “Let’s Talk Cross-Chain” and “The Cross-Chain Insider.” Find both on their YouTube channel and wherever you get your podcasts.
• At the time of writing, the protocol claims Volume Swapped is at about $250MN and the total number of transactions is at 185,992.

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That one hack

Even though the slogan on their website is, “Battle-tested by thousands of daily users,” LiFi was recently hacked. The Knownsec Blockchain Lab, a Chinese security firm, described that faithful evening’s events in their analysis of the hack:

“On the evening of March 20, Beijing time, Knownsec Blockchain Lab monitored an attack on the distributed cross-chain protocol Li.Finance on Ether, where the attackers executed 37 call injections to obtain about $600,000 in assets (204 ETH) in multiple wallets.” 

Even though the booty wasn’t an exorbitant amount, “the project’s handling of the attack was very aggressive and worth learning from and acknowledging.” However, the LiFI team, “compensated for the protocol loss and re-deployed the protocol after repair.” Make of that what you will. 

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Recent API use cases

• App: DeFi Saver. Uses LI.FI “to facilitate the cross-chain transfer of assets between Ethereum, Arbitrum, and Optimism.”
• App: BlockWallet, a “self-custodial crypto wallet with advanced privacy tools.” The users "can now bridge and swap across 15 chains via transferto.xyz, powered by LI.FI.”

https://twitter.com/peter__jessy0/status/1539935708068155396

• App: SDK. LiFi will open the doors to other blockchains. “Alchemix users can now bridge gALCX and alUSD to Fantom or Arbitrum by simply going to the Bridge section without leaving the Alchemix interface.”
• The Gnosis Chain NFT collection xDAI Tigers integrated the LI.FI Widget on the mint page for the Gnosis Monkeys. Users can purchase or swap “any asset from any chain supported by LI.FI without leaving the mint page.”
• App: Celo, a “layer 1 smart-contract platform focused on the deployment of dApps on mobile devices.” Any LiFi user “will be able to send tokens to Celo via any-2-any cross-chain swaps.” Users also have access to Celo-specific apps like exchange Mento.finance and lending protocol Moola.

https://twitter.com/lifiprotocol/status/1539473373297643521

• App: Dataverse, “a web3-native project specializing in data ownership.” Their other specialization is privacy. The app integrated the LiFi widget, so “users can now perform any-2-any swaps across every chain supported by LI.FI.”
• App: Alps Finance, “a social DeFi investing platform.” Users can now swap any token across every chain supported by LiFi without leaving the Alps Finance dApp.

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Conclusions and predictions

This project has the potential of becoming a huge business. Just imagine a future that is actually cross-chain, in which this service simplifies its users’ lives. Its existence could greatly benefit the whole DeFi stack and open it up to a greater number of players. If LiFi succeeds and evolves into the giant it aims to be, it’d be the very center of the DeFi space. 

In that privileged position, there are infinite fees to be made. They’ll also be handing out money and clients to projects and services throughout all of those EVM-compatible blockchains. And that can buy favors and go a long way. If those projects rely on LiFi to be at the center, integrating all those liquidity pools, the sky's the limit.

However, there are many “if’s” in this story. The present is multi-chain, but it’s not guaranteed that the future will be. One of the smart contract-enabled blockchains could have a breakthrough and leave all the others in the dust. A winning blockchain would drain all of the other’s liquidity and render LiFi obsolete. If that doesn’t happen, the product will always have to face fierce competition simply for the place it wants to be in. The mere center of a billion-dollar industry.

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Buy/No Buy recommendation

If you believe in a multi-chain future, buy.
If you believe there shall only be one smart-contract enabled blockchain, skip.