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EP 34: Economics of Cross-chain DEX with Sifchain.
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TLDR below. This is not financial advice.
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In the previous episodes, we have done plenty of deep dives into decentralised exchanges. For example, Uniswap using X*Y=K, Bancor uses a more complex model that arrives at a similar result and Balancer uses a formula with more variables. Today, we will be sharing another DEX, Sifchain. The main difference is that it is built on their own blockchain. This adds some complexity to the usual AMM incentive and reward structure. And that's what we are going to cover!
Cross-chain AMM vs usual AMM
In DEXs, we're always talking about a typical AMM. That is built on a specific layer one and you don't have to think about how to deal with validators to validate these transactions. (Because that is done by someone else as it's a different protocol, a different set of people, a different company, different project, different open-source smart contract.)
Typical AMM: Built on Ethereum like Uniswap
In typical AMM’s they're just building a platform to transit between the crypto-assets so for example on Uniswap you can transact between ETH and wNXM or wBTC. There are all these different assets available which are ERC20 that you could trade and swap.
Cross Chain #1: Built on Ethereum like Bancor
Then we have this another type which is different because it's similar to Uniswap and it allows you to trade between assets and expands a little bit further. You can also trade ERC20 assets and crypto assets on EOS or in Tron.
Think of each layer one as a country, In Ethereum everything is built in the U.S. Only U.S stocks are being traded over there. Bancor is where you can trade stocks that are from the UK so you live in the states and you can trade with UK stocks.
Cross Chain #2: Built on its own Layer 1 like Sifchain
Lastly, application specific blockchain also allows for cross-chain exchanges. It adds in a layer one component so it has its own layer one solution where it will validate each of these transactions as well.
There are a lot of pros and cons to that. Pros generally being that it's probably a lot faster, a lot cheaper and you can control a bit more of the different behaviors and different incentives to affect a different kind of behaviors that you want to have in your ecosystem. Because you can control or you can incentivise actions in the validators layer and the liquidity provider layer so the application layer. The cons is that because you have two focuses, now it's important to balance them.
Sifchain big picture overview
Sifchain vs Bitcoin
I want to show you when comparing Sifchain and Bitcoin because they have the similar idea. Blockchain consists of blocks and they are connected in chains.
Each block we need to verify transactions, which will record transaction information between the two parties. Each verified block will be put into the chain. This is verification that exists.
Where is Bitcoin created?
Bitcoin is generated from each new block, which is verified. But the winning validators will get these new Bitcoins. And step by step more Bitcoins is brought into the network. These are what we call layer 1
What happens on top layer 1?
What is built on layer 2 are decentralised applications (Dapps). If you send me your 1 Bitcoin, it happens on the application layer and all of this transaction information is confirmed and put into the next block on layer 1.
Sifchain, as you can imagine, is also quite similar it has layer one solution and it has a little box to be validated so if we go back to layer one again you have block one, block two, block three that will be validated so block one is when you have all these different transactions and then you also have validators that will be getting your tokens and their token is called $ROWAN so they will also be getting these tokens which are basically block rewards and the key difference is that in bitcoin your block reward is fixed and it only changes every four years but here the block rewards changes every single time a transaction occurs because it is dynamically increasing and it's dynamically calculated so the block rewards for every block that's minted by validators changes and so layer one is the validators which is same as bitcoin.
The main difference:
Bitcoin has a fixed reward and a decreasing half every 4 years.
$ROWAN validators get paid every second when transactions occur dynamically. So block reward from $ROWAN will change and not be fixed.
Furthermore, the applications on Bitcoin's layer 1 are P2P transactions such as BTC transactions from person to person. In dapp layer for $ROWAN, transactions or swaps are executed with $ROWAN pair and Validators will receive $ROWAN rewards. So these are the basic ideas that differ between them.
What Else Did You Miss?
Sifchain economics mechanism
How do participants make decisions?
How rewards will be affecting Validators / Liquidity Providers.
How will the rewards affect liquidity providers?
What are the different parameters that affect the Validator System?
How do they decide to deal with this fee?
How can the asymmetric addition be added to the liquidity pool and equalise the composition?
Economics of Sifchain token
Rebalancing is key
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TLDR: That is about Sifchain which will probably start the scheduled launch in mid-January. This system is quite interesting, it adds a new dimension to a new layer to such systems. One of the problems with all these different systems built on Ethereum Blockchain where transactions get very expensive. We have other solutions like Thorchain that is built on layer 1, but they do not exactly interact with ERC20 tokens. So Sifchain resolves that by having both Validators and Liquidity Providers on their system. It is a layer 2 solution with their own Dapp. We also have layer 2 solutions, but most of them have fixed parameters, which makes Sifchain different as they can rebalance the parameters depending on the conditions of the system. Let us keep an eye on whether Sifchain becomes a welcome solution.
Get smart: Sifchain is ahead of the curve when it comes to application specific blockchains to reduce reliance on ETH network and to reduce transaction costs.
Get smarter: Sifchain is coming out next week. Check out https://sifchain.finance to follow their plans.
Ps: Order the textbook "Economics and Math of Token Engineering and DeFi" today!