Decentralized finance (DeFi) is moving so fast. It never stops looking for new, better, and more exciting ways to bring in more assets and users. Here’s what’s so exciting about this new development! XRP is a cryptocurrency widely known for its speed and efficiency in cross-border payments, but it’s now being brought into the DeFi ecosystem. This includes seamless integration with smart contracts on nearly all major blockchains courtesy of inventive bridging technology from Flare Network. Anjali Mehra, DeFi opinionated crypto crusader, looking to explore Flare Network’s technology. She’ll walk you through how FAssets (FXRP) gives XRP the ability to participate in the DeFi ecosystem.
What is Flare Network?
Flare Network is an EVM-compatible Layer 1 blockchain that’s dedicated to introducing interoperability across multiple blockchains. This is because it features interoperability, or the ability for multiple blockchains to easily communicate and share information across networks. Known as the bridge oracle, this is the mysterious piece that brings smart contract capabilities to otherwise smart-contract-less blockchains. For instance, it improves the RFQ the XRP Ledger.
Flare achieves this interoperability through two key protocols: the State Connector and the Flare Time Series Oracle (FTSO). Using the State Connector, Flare can replicate the state of any other connected blockchain on its own network. That makes it possible for you to move data from any other blockchain onto Flare. This encompasses transaction records and data on asset ownership across various wallets. The FTSO’s decentralized and independent price feeds are key to ensuring a network of constantly competing price feeds for safe DeFi applications.
How Flare Unlocks XRP for DeFi
Flare mirrors the state of other connected blockchains. This means data from each of those blockchains can be imported to Flare and used within their own ecosystems of native decentralized applications (dApps), opening up the XRP blockchain to the world of DeFi. This is where FAssets come in. FAssets are one-for-one collateralized representations of assets from other blockchains on the Flare network. With respect to the XRP, for example, the associated FAsset is FXRP.
FXRP wraps XRP and empowers XRP holders to use it in DeFi protocols. This integration takes place within the thriving Flare ecosystem. This creates an incredible array of opportunities for diverse XRP holders. With these new capabilities, now they can earn yield, participate in lending and borrowing, and other DeFi activities that were beyond their reach, unlocking billions in dormant liquidity.
Minting FXRP: A Step-by-Step Guide
To get FXRP, you’ll need to convert your XRP to FXRP. The process involves a few steps:
- A user sends their XRP to a registered agent's address on the XRP Ledger (XRPL).
- The registered agent then provides collateral on Songbird, Flare's canary network, to back the minting of FXRP.
- This collateral is a mix of XRP, SGB (which will be FLR on the mainnet), and stablecoins.
- To ensure safety, the collateral ratio is maintained at a minimum of 1.3x the value of the FXRP being minted.
The Core Vault functions as a liquidity pool, where agents can deposit their XRP into a shared marketplace. Through this process, they are able to release their FLR collateral tied up on Songbird and Flare networks.
Benefits of XRP in DeFi
Flare Network is bringing XRP into the DeFi space and this development brings plenty of awesome benefits. This is a big win for both XRP holders and the overall DeFi ecosystem.
Increased Liquidity and Efficiency
With XRP's high transaction capacity (1,500 TPS) and low energy consumption, its integration into DeFi could bring more liquidity to the ecosystem. This would facilitate much quicker, cheaper, and more seamless transactions across DeFi protocols.
Enhanced Cross-Border Payments
XRP’s main use case has always been clear – powering cross-border payments and acting as a bridge currency for fiat. By introducing XRP to DeFi, this massive ecosystem’s potential to deliver fast and affordable international transactions would be greatly expanded.
Diversification of Assets
The addition of XRP in DeFi would broaden the assets present in the ecosystem. Doing so would diversify the DeFi ecosystem’s dependence away from other cryptocurrencies such as Bitcoin and Ethereum, which would make the ecosystem more resilient overall.
New Lending and Borrowing Opportunities
The XRP Ledger-native Lending Protocol (XLS-66d), which enables on-chain, uncollateralized fixed-term loans, could provide new lending and borrowing opportunities in DeFi.
Growth of Tokenized Assets
Archax has now successfully proved the tokenisation of abrdn’s US Dollar Liquidity Fund on the XRP Ledger. This innovation would quickly expand the range of off-chain assets that can be tokenized and minted into the DeFi ecosystem.
Potential Risks to Consider
While the integration of XRP into DeFi through Flare Network offers exciting opportunities, it's essential to be aware of the potential risks involved.
- Technical Risks: As with any blockchain network, there is a risk of technical failures, security breaches, or other disruptions that could impact the use of Flare Network.
- Oracle Dependence: Flare's ecosystem relies on decentralized oracles, and can be a single point of failure if not properly secured.
- Interoperability Risks: Flare's ability to bridge assets from other networks, such as Bitcoin, may be subject to risks associated with those networks.
Market Outlook
Flare’s technical outlook presents a downside risk of more than 30% as it is unable to breach an important trendline resistance. Flare’s price action is decidedly bearish at this point. It still hasn’t been able to escape the lower high sequence that has consistently dogged price action since December.
Though there are significant advantages and dangers, the addition of XRP to DeFi through Flare Network is a tremendous step forward. This new development is a win for the XRP community and DeFi ecosystem. This groundbreaking development offers some fascinating new opportunities for XRP holders. It vows to improve liquidity, productivity and efficiency, and catalyze innovation in decentralized finance. As with anything, you should always DYOR and understand the risks before engaging with any DeFi protocol.
