Stargate Finance is an interoperable cross-chain liquidity protocol that enables users to transfer local assets cross-chain in a single transaction through the protocol’s unified liquidity pool. The main features of STG are instant guaranteed certainty, local asset transactions and combined liquidity.
What is Stargate Finance?
Stargate Finance is a fully flexible, cross-chain liquidity protocol created in March 2022 by LayerZero Labs. It is an interoperability solution that integrates liquidity pools from multiple decentralized finance (DeFi) protocols. The platform allows users to easily transfer coins without fiat on various blockchains, including native cryptocurrencies Ethereum, BNB Chain, Avalanche, and Phantom. Layer 2 such as Arbitrum, Optimism and zkSync Era are also supported. In addition, transfers made through STG are guaranteed instant certainty.
Importance of Interoperability
Simply put, interoperability greatly enhances the strength of DeFi. Blockchains were historically known as silo networks and given their separate architecture they could not communicate between chains. This naturally led to liquidity fragmentation, and since DeFi protocols only had access to their own liquidity, the use cases that could be created were limited.
With interoperability solutions, liquidity has become easier to flow between different blockchain and DeFi protocols. This has improved the liquidity accessible by the protocols, enabling them to offer low cost transactions to users.
Bridges are currently the most common interoperability solution. However, bridges have some drawbacks.
What are developers trying to achieve when building a cross-chain bridge? three main features Is:
- Instant Settlement Guaranteed: Once a transaction request is made on the source network and approved by the user, the receipt of the asset on the target chain must be confirmed.
- Combined Liquidity: With multiple chains having access to a single unified pool of liquidity, the liquidity will be deeper and the users and applications that use it will benefit. This bridge also acts as a signal of credibility and attracts even more liquidity.
- Local Property: The transfer is done with local properties. This eliminates the need for additional steps and fees associated with obtaining assets eligible for wrapped asset bridging.
Given that it’s a trilogy, the developers often have to sacrifice a feature or two. Several bridge architectures have been proposed, bringing a different suite of bridging features to users.
How does Stargate Finance work?
Delta Algorithm is a new balancing algorithm that allows for local asset transfers with instant guaranteed certainty through a unified cross-chain liquidity pool that allows all on-chain and DeFi applications integrated with Stargate Finance to deposit funds from a single liquidity pool and allows removal. The traditional problem with combined liquidity pools is that a large number of simultaneous withdrawal requests made to the same pool potentially empty the pool before claims are met, resulting in high return rates.
With the Delta algorithm, Stargate Finance can programmatically control the combined liquidity pool to prevent users from emptying before their transfers are processed. In general, the delta algorithm enables all chains in Stargate Finance to maintain multiple “soft split” individual liquidity pools. For example, the Ethereum network may have a liquidity pool of $75 million. In this pool, a specified amount (say $10 million) can be given to BNB Chain, $12 million and more to Phantom.
Flexible segmentation allows the pool to borrow independently from the sub-pool during a liquidity crisis and pay later – after the trade has been executed. This lets the delta algorithm process large requests simultaneously and reduce liquidity gaps. However, the biggest limitation of the delta algorithm is the possibility that requests can exhaust the funds available to a pool and its sub-pools. Stargate has introduced rebalancing fees to mitigate the situation.
Rebalancing fees are basically transaction fees that incentivize users to move liquidity in such a way that all balances remain above their initial value. A protocol usually starts with an optimal balance of assets. Every time a user makes a transfer, the pool becomes volatile. The rebalancing fee will incentivize users to refill low-balance assets and discourage users from consuming certain assets. The rebalancing fee is a function of both the transaction size of the user’s transfer and the available pool balance.
Rebalancing fees taken from transfers will be pooled and sent to the prize pool. This amount is then distributed to users who help rebalance the pool. The amount of rewards received by users will depend on how close the user’s refills bring their pool balance to the target balance.
Features of Stargate Finance
Stargate Finance has some innovative features that set them apart from existing bridges.
instant accuracy guaranteed
Transfers made at Stargate Finance are guaranteed instant certainty. The protocol requires that all target chains have sufficient reserve balances to properly process swap requests. If the reserve balance is insufficient, the transfer will not be done. Hence, there is no possibility to reverse the transaction. This prevents users from encountering bridging errors due to liquidity issues or incompatibility of wrapped tokens. Once a transfer is sent and confirmed on the source chain, users are guaranteed to receive native tokens on the target chain. This reduces the need for users to pay unnecessary gas fees for transaction failures.
domestic asset transfer
Users can trade native tokens between chains on a 1:1 basis by taking advantage of Stargate’s consolidated liquidity pool. After the transfer is complete, users will receive a native asset instead of a synthetic token, which usually has limited use cases. It also eliminates the need to go through multiple steps to obtain tokens suitable for wrapped asset transfers, which often come at a high cost.
Stargate Finance allows one-click trading for all tokens and chains. One-click swaps eliminate the need to move a coin from one network to another. For example, you can exchange Ethereum USDT for BUSD, even if USDT is on the Ethereum network and BUSD is on the BNB network.
joint liquidity pool
Stargate Finance allows users to access liquidity pools from different blockchains. This allows LPs to participate in liquidity mining activities in as many pools as they wish through a single interface. Stargate primarily supports stablecoin liquidity pools to avoid the risk of floating losses.
It also creates deep liquidity for the entire DeFi ecosystem. This ultimately means reducing slippage and improving the credibility of DeFi protocols as they now have a larger pool of liquidity that can be leveraged.