I want to clarify the difference between 1) DeX on an independent zone and 2) DeX on the hub with hub-level-security. Below is an explanation of reasoning of DeX on the hub.
DeX is all about Liquidity and Strong Security
DeX is all about liquidity concentration. Liquidity is the key ingredient for successful DeX.
In Ethereum space, most successful DeXs are providing layer1 security, because as a liquidity pool, the users want layer1 level security when they peg in their precious assets.
DeX Competition across the entire blockchain space
DeX is a universal use-case across the entire blockchain space. We have to compete with 0x, kyber, omg, uniswap and more. Cosmos has a good advantage, IBC, which connects different kinds of networks. So, as a network with primary utility being interoperability, DeX should be one of the main utility provided by the hub.
DeX on Independent Zone is Not Providing Enough Security to Absorb Significant Usecases
However, decentralized approach of DeXs with second layer security will not give us enough competitiveness against booming Ethereum DeXs with layer1 security. DeX on zone is not same as kyber because the security guarantee lies on different size of trust.
With similar analogy, DeX made by centralized exchanges such as Binance Chain will not provide us enough decentralized security because it is a giant corporation without any intention to decentralize their possession of network. It is not the alternative approach of DeX on the hub either.
DeX and IBC Usecase Growth
We need a strong DeX utility with hub-level-security so that the liquidity can be concentrated in one pool to have enough momentum to compete with other solutions.
If we lose this competition, IBC will lose one of the main purpose of interoperability, trading. Solutions from Ethereum community will absorb liquidity from networks including Cosmos networks, and it can be a disaster for IBC usecase growth. I agree that IBC has much broader potential of usecases besides trading, but we should admit that it will be the main usecase for at least several years.
How to Build DeX on the Hub
There are two different kinds of approach regarding DeX on the hub.
- Direct implementation on Hub’s module
- adv1. simple implementation
- adv2. more direct connection between IBC and DeX utility
- disadv1. security risk of the hub
- disadv2. congestion of tx on the hub
- A DeX zone providing Hub level security and sidechain scalability with zk-rollup technology
- adv1. keep the Hub-level-security
- adv2. theoretically unlimited scalability without congestion of the Hub
- disadv1. relatively complicated and indirect connection between IBC and DeX usecase
- disadv2. very difficult to implement zk-rollup application
Why we need to seriously discuss this topic right now
- Successful DeX on the hub is one of the most important thing regarding the growth of IBC use-case
- DeX on independent zones will not become a significant usecase of Hub’s IBC utility
- Considering booming usecases of DeFi and DeX on Ethereum community, we are already late to compete
Co-Existence of DeX on Hub and DeXs on Zones
Although DeX on Hub will generally provide better liquidity and better security, DeXs on Zones can co-exists on their localized domain and specialties. Liquidities on the Hub and on Zones can be borrowed from each other with advanced IBC technologies to form better connected utility of liquidity.
So, those two approaches are not competing each other. They should co-exist with different specialties. What I have argued in above paragraphs are that we should have at least one Hub-level-security DeX to compete with DeXs on other networks. And the DeX should directly benefit Atom holders and directly controlled by Atom holders to maximize the utility of Atom, hence increase the value of the Atom.
Why it should be community driven?
ICF and Tendermint has a regulatory position which advices them Not to directly participate on any financial utilities(Please correct me if I am wrong). So, in order to proceed this topic, only community members can drive the actual movement. Passive attitude to this topic will not bring us anywhere, because of such regulatory status.
It has been very successful journey for us, and now finally we are looking at very near future of real IBC on the Hub. Now is the right time to think about its usecases, and now we cannot run away from usecase discussion anymore. It is time to figure out to actually attract usecases of IBC.