IDEX Prioritization — Hybrid Liquidity vs Layer-2

We’ve recently announced our hybrid liquidity (HL) initiative, a new exchange product that brings the best of orderbook and AMM DEXs into one. Those that follow IDEX closely may wonder why we’ve prioritized this new initiative over the finalization of our layer-2 scaling solution.

TL;DRwe’ve identified a unique opportunity for IDEX to execute on a breakthrough product, and we’d be crazy to spend energy on anything other than getting it to market as quickly as possible.

IDEX 2.0: High-performance DEX

In 2019 we set out to redesign IDEX from the ground up. We had run into scaling challenges in 2018, and our thesis was that for orderbook DEXs to be competitive, they needed to be both as performant and as cheap as centralized exchanges. With the launch of 2.0 in October of 2020, we delivered on the high-performance exchange, but it appeared that without the corresponding L2, Ethereum network fees limited the attractiveness of the product.

IDEX BSC represented a shortcut to scalability, and our recent launch gave us both high-performance and low cost at ~$0.40 per settlement (~100x cheaper than ETH). In spite of this we still haven’t seen the uptick in volume that we were expecting. This is not a function of limited BSC usage, as the latest stats show equivalent TVL and 4x transactions on BSC as compared to ETH. Furthermore, we’ve watched as Ethereum based, L2 orderbook DEXs have struggled to break out of the initial bootstrapping phase and achieve any sort of meaningful growth. The market has spoken, telling us that scalability alone is insufficient, and that we need to take another path.

Rise of AMMs

During this time we’ve seen another story unfold with the rise of AMMs. Now the dominant form of DEX trading, AMMs have grown at a blistering pace, even in the face of rising transaction fees. It’s clear that low fees are only one component, that people will embrace a product that is sufficiently differentiated in spite of the costs, and that the real key is to deliver a product that addresses some deep seated needs in the market.

In spite of their success, AMMs are not the end all be all of exchange design. A quick search of social media will show thousands of users frustrated by failed trades, slippage, and manipulation. At the same time, orderbooks clearly aren’t going away, as they provide a level of flexibility that is impossible to replicate in AMMs.

Many teams are working to figure out what the next evolution of exchange will be and how these two designs will work together. The future lies at the intersection of these ideas, and given the work we’ve done to date, with our high-performance trading engine paired with smart contract custody and settlement, we are the only ones who can properly execute on this vision. Solving this problem will bring with it massive upside, and doing so successfully requires all of our attention and resources.

IDEX HL: A Better Exchange Design

Hybrid Liquidity fuses our existing orderbook exchange with AMM liquidity pools. The pool liquidity is displayed on the orderbook alongside regular limit orders, and users can interact with this combined set of liquidity through both an orderbook or swap interface. The trading engine will ensure they get best price execution across all liquidity options, while also allowing for new interactions with liquidity pools like stop-loss.

The result is not only an AMM without the downsides, but also an entirely new way of interacting with liquidity pools. The detailed list of advantages is captured in our announcement post.

IDEX HL also brings a few specific go-to-market advantages that we believe will help us kick off the flywheel:

  • Liquidity pools + liquidity mining are a proven way to quickly grow TVL
  • Static pricing via an AMM curve guarantees arbitrage opportunities, and with it trade volume, even early on when user growth is just getting started
  • Both of these metrics provide great marketing opportunities that help jumpstart the flywheel (attractive liquidity mining -> growing TVL -> growing volume -> attract new users -> attract liquidity -> etc.)

IDEX Layer 2

This shuffling of priorities does not mean that we have abandoned our L2! We still fundamentally believe that the design of O2R, with off-chain data availability and a unique rebuttal mechanism, is unique in achieving the level of scale that a top-tier trading platform requires. However, this scale is more meaningful when the product is running into scaling issues. Our immediate focus on this unique market opportunity will jump start usage to the levels where the scalability really matters.

As always, reach out to us on Discord or Twitter if you have any questions, and thanks for your continued support!

-Alex

Co-founder/CEO of idex.io