Understand in three minutes the $5.5 million financing of the cross-chain trading aggregator LI.FI

Author: iambabywhale.eth, ForesightNews

As the multi-chain ecosystem of blockchain gradually flourishes, the cross-chain interoperability track has started to come into the view of most people. Unlike basic asset cross-chain bridges, cross-chain interoperability protocols need to have contract calling capabilities between chains. For ordinary investors, the different transaction fees and Gas costs incurred by different DEXs due to varying mechanisms make it difficult to find the optimal trading channel based on their trading needs, and the multi-chain ecosystem adds another layer of complexity. This has led to an increasing demand in the market for solutions that can traverse all trading contracts across multiple chains to find the best trading path.

LI.FI (formerly known as Li.Finance) has developed a protocol that finds the optimal trading path through smart routing to address the above needs, but it is not an application layer protocol; rather, it is a tool. However, the protocol itself has also developed a cross-chain trading protocol transferto.xyz, which supports 9 cross-chain bridges, 15 blockchains, and all DEXs on the supported chains. Just recently, the cross-chain trading aggregator LI.FI announced the completion of a $5.5 million funding round, led by 1kx, with participation from Dragonfly Capital, Lattice Capital, Scalar Capital, 6th Man Ventures, Coinbase Ventures, BairesDAO, and AngelDAO, among others.

Funding and Team

According to information on the official website, LI.FI has received investments from institutions such as 1kx, Dragonfly Capital, Lattice Capital, Scalar Capital, and AngelDAO, but I could not find public information.

In addition, according to LinkedIn information, the founder and CEO of LI.FI is Philipp Zentner, who founded the information analysis company STOMT in September 2012 and served as CEO. The company helps brands collect and manage qualitative feedback at scale through standardized communication, machine learning, and natural language processing (NLP). Subsequently, Philipp Zentner began participating in Web3 projects in 2021, serving as a co-founder of the NFT project CryptoPixels and the DeFi project Freibier.io on the Tezos chain, and officially founded LI.FI in May 2021.

The co-founder and CTO of LI.FI is Max Klenk, who was also a co-founder and CTO of STOMT and holds a Master of Science degree from the Hasso Plattner Institute in Germany, specializing in systems engineering.

It appears that although the two founders entered the Web3 industry relatively late, they possess considerable technical strength.

LI.FI's Functionality

In simple terms, LI.FI's functionality is to find the optimal trading path between multiple cross-chain bridges and blockchains through the built-in algorithms of the protocol, and the design details of the algorithms will not be discussed here. According to the founders of LI.FI, the ultimate goal of LI.FI is not just to provide a product that optimizes the trading experience, but to become a universal protocol for future DApps.

According to information on the official website, applications currently using the protocol include ParaSwap, CowSwap, DODO, as well as wallets Steak Wallet and Alpha Wallet, and even the cryptocurrency custody and asset management platform Cobo.

DEX protocols integrated with LI.FI can achieve cross-chain and cross-asset trading within a single interface, allowing users to avoid searching for low-cost cross-chain bridges and DEXs and performing multiple operations. However, in practice, unlike the vision of LayerZero, which aims to achieve interactions without requiring native tokens on the target chain as Gas, LI.FI still requires holding a certain amount of native tokens on the target chain as Gas fees to conduct transactions.

For example, to trade HOP (Hop Protocol governance token) on Ethereum for AVAX on Avalanche, LI.FI calculates that 1285 HOP can be exchanged for approximately 9.8758 AVAX.

LI.FI chooses the path that can exchange the most target tokens, and while this path may not be the one with the lowest Gas fees, it offers the best cost-effectiveness when considering transaction time and the number of target tokens exchanged. Of course, LI.FI also provides optional paths for users to choose from, catering to users with specific DEX or cross-chain bridge interaction needs or special time requirements.

The blueprint envisioned by the founders of LI.FI is built upon such functionality. Rather than focusing on specific products, LI.FI aims to "abstract" the protocol and establish a cross-chain aggregation tool that can be integrated by any application. For multi-chain supporting applications, there is no need to reinvent the wheel; they only need to integrate LI.FI to achieve cross-chain interactions. Additionally, LI.FI supports integration with wallets, games, and other applications, providing independent solutions for different applications.

Drawbacks of LI.FI

Although LI.FI has its unique features in cross-chain interoperability, and the founding team, which has experience in data and content analysis, ensures its ability to collect and analyze on-chain data, security issues must be addressed when it comes to cross-chain solutions. In fact, LI.FI suffered a hacker attack in March of this year, where hackers exploited LI.FI to authorize certain tokens in user wallets, stealing a total of $600,000 from multiple wallets. Although the financial loss was not high, it indicates that interoperability protocols like LI.FI and the current cross-chain solutions in use may still be technically imperfect, posing a potential risk.

Furthermore, through practical testing, we found that LI.FI's cross-chain transactions still require native tokens of the target chain as Gas fees. Compared to existing solutions that only require the original chain token to pay Gas fees to invoke target chain contracts, LI.FI appears somewhat "outdated." However, whether LI.FI will make adjustments in the future and whether new solutions will be sufficiently secure remain to be seen over time.