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Okay, now let’s dive into today's topics. This is what we have for you today:

• 🔥Why One of the Largest DEXs is Abandoning Ethereum?

• 🔢 Metric of the Week

• 💎 Gem of the Week

TL;DR

• AppChains offer a high degree of customizability for specialized use cases, as demonstrated by dYdX's transition to becoming an AppChain.

• While Layer 2 rollups are evolving, they currently lack the level of customizability that AppChains provide, and many are not yet fully decentralized.

• The future of AppChains will largely depend on the evolution of rollups. If rollups can offer highly customizable environments with robust Layer 1 security, AppChains may lose their unique value proposition.

AppChain Vs Rollups

The AppChain thesis, a concept that suggests protocols built on a blockchain will ultimately aim to operate as sovereign chains, has emerged as a pivotal topic in the blockchain discourse. This has fundamentally split the blockchain sphere into two distinct camps: AppChains and Rollups.

The transformation of dydx from an Ethereum rollup to a Cosmos Appchain is one of the most important events in this context and dydx appchain is nearing imminent launch.

In this edition of Just the Metrics, we will delve deep into the AppChain thesis, provide an overview of the “AppChain Camp”, discuss the transition of dydx, and explore the implications that the AppChain thesis carries for the trajectory of blockchain technology.

Ok, let’s dive in👇

DYDX V4 Appchain Launch

dYdX is a decentralized exchange that handles over half a billion USD in daily trading volume.

It has recently launched its public testnet and is gearing up for a significant transition. The upcoming dYdX v4 will be developed as a standalone blockchain, utilizing the Cosmos SDK and Tendermint Proof-of-Stake consensus protocol.

This version aims to feature a fully decentralized, off-chain orderbook and matching engine capable of scaling to a level of throughput far beyond what any current blockchain can support. The $DYDX token is expected to serve as the primary token for dYdX v4.

dYdX's transition to a standalone blockchain has sparked a significant debate in the blockchain community, particularly between proponents of AppChains and Rollups.

The AppChain Thesis

The AppChain thesis is a concept that posits protocols built on a blockchain will eventually aim to operate as sovereign chains. This idea is rooted in the belief that as every protocol built on a blockchain seeks to scale, they will prefer to deploy as independent chains. This approach provides them full control of their protocol without relying on a L1 blockchain.

The premise behind this thesis is that sovereignty can offer numerous advantages to a protocol.

By opting for the sovereign route, protocols gain full control over various aspects of their operations, including maintaining their own consensus, security, validator set, and uptime.

Instead of being dependent on the underlying L1 running smoothly, they would acquire full accountability for running their sovereign blockchain. This can be both a blessing and a curse, presenting a unique set of advantages and challenges, which we will explore further in this document.

The AppChain Camp

Ecosystems like Cosmos, Polkadot, Avalanche, and Cardano fall into the AppChain camp, each with their unique approach to implementing and managing AppChains.

These ecosystems are developing frameworks and tools to facilitate the creation, deployment, and management of AppChains, and are fostering an ecosystem of interconnected AppChains that can communicate and interact with each other.

Cosmos Zones

Cosmos pioneered the concept of a world of interconnected blockchains, leading to the creation of the Cosmos SDK, a modular framework for customizing and developing blockchains.

These Zones, can communicate trustlessly via the Inter-Blockchain Communication (IBC) protocol. As of now, the Cosmos ecosystem has grown to include more than 60 Zones, interconnected by over 100s of IBC relayers.

Many of these Zones are AppChains, each serving a unique purpose. For instance, Osmosis, one of the largest Cosmos Zones, is an AppChain that implements an Automated Market Maker (AMM) DEX.

In the early stages of Cosmos Zones, each Zone was tasked with its own security. This meant that each Zone had to establish its own validator set and incentivize them with the Zone's native token.

However, this approach presented a significant barrier for AppChain builders, as it required them to divert their focus from their core application to the recruitment and management of validators.

To alleviate this issue, Cosmos is now introducing a change through the Interchain Security Module. This change will enable smaller Zones to leverage the security of the Cosmos Hub, thereby reducing the hurdles to establish and secure individual AppChains.

Polkadot Parachains

Polkadot's multichain ecosystem is composed of chains known as Parachains, which are developed using the Substrate SDK. Unlike Cosmos, Polkadot has adopted a shared security model from its inception. All Parachains share security with the main Polkadot chain, known as the Relay Chain, which primarily provides consensus and security to the Parachains.

Due to this shared security model, Polkadot does not allow Parachains to launch without permission. Instead, Parachain slots are auctioned to developers who wish to build a custom chain. These developers must lock DOT, Polkadot's native token, to secure a Parachain slot.

As of the second quarter of 2023, Polkadot has successfully completed 45 Parachain slot auctions, with 46 Parachains currently active. These Parachains have collectively locked over 133 million DOTs, which is approximately 10% of the total supply.

The Parachains in the Polkadot ecosystem can communicate with each other via the Cross Consensus Messaging (XCM) format. The implementation of XCM communication is ongoing and is currently functional, but it requires the storage of the messaging data on the Relay Chain.

Avalanche Subnets

Avalanche's approach to the AppChain thesis is through the implementation of Subnets, which are similar to Cosmos Zones.

Developers can launch their own Subnets, each of which can support multiple chains. However, these Subnets need to recruit their own validators, who must also validate Avalanche's Primary Network. This requirement increases the security of the Primary Network but also raises the barrier to entry for dedicated Subnets.

As of mid-2023, the amount of AVAX staked on Avalanche's Subnets rose to 120,000 representing an increase of 33% from the previous day. As of now, Subnet validators accounted for more than 12% of the total validator count, indicating a rapidly growing demand for Subnets source.

The Avalanche Subnet ecosystem currently does not support native inter-Subnet communication, and Subnets have to develop their own bridges. This could potentially be a hurdle for the seamless operation of interconnected AppChains within the Avalanche ecosystem.

Cardano Sidechains

Cardano, a member of the appchain camp, is developing an ecosystem of specialized sidechains, such as Midnight and Worldmobile Chain. These sidechains are unique components of the Cardano ecosystem, each focusing on a specific application or functionality.

They are designed to borrow security from the Cardano mainchain, leveraging its established security mechanisms to ensure their robustness and reliability.

However, this concept is still in its early stages. The exact mechanisms for borrowing security from the mainchain are yet to be fully defined and implemented.

Additionally, the development of specialized communication channels for efficient and secure interactions between the mainchain and the sidechains is underway. The specifics of these communication channels and the overall roadmap for this model are still under development.

So, although Cardano falls into the appchain camp, its ecosystem is currently less developed in terms of appchains compared to those of Cosmos, Polkadot, and Avalanche.

The DYDX Experiment

The transition of dydx from a rollup to a Cosmos AppChain marks a significant shift in the blockchain landscape. This move is not just a technical adjustment but a strategic decision that has the potential to redefine the protocol's future.

As one of the largest decentralized exchanges (DEx) with over half a billion USD in daily trading volume, dydx's transition is one of the most closely watched experiments in the blockchain space.

The Rationale for the Transition

The decision for dydx to transition to a standalone blockchain was primarily driven by the team's commitment to full decentralization. They believe that the level of decentralization of a system is determined by its least decentralized component. This philosophy implies that every aspect of the v4 protocol needs to be decentralized, while also maintaining high performance.

Existing trading models, such as Automated Market Makers (AMM) or Request for Quotation (RFQ) systems, were evaluated but ultimately deemed unsatisfactory. The team identified the need for a trading model that could support the high throughput required for a top-tier orderbook and matching engine.

To illustrate the scale of this requirement, the existing dydx protocol processes approximately 10 trades per second and handles around 1,000 order placements or cancellations per second. When compared to these operational demands, the limitations of Layer 2 rollups became clear, as they were unable to support such high throughput.

Given these considerations, the team concluded that an orderbook-based protocol was essential to deliver the trading experience demanded by professional traders and institutions.

This led to the decision to transition to a standalone blockchain, allowing for the necessary throughput and performance while maintaining a commitment to full decentralization.

Profiting from Being an AppChain

By becoming an AppChain, dydx can fully customize how the blockchain itself works, as well as the jobs that validators perform.

This allows dydx v4 to have extremely high throughput for the orderbook while remaining decentralized.

Traders would not pay gas fees to trade, but rather pay fees based on trades executed similar to dYdX v3 and centralized exchanges.

These fees would accrue to validators and their stakers. This model provides a unique advantage to dydx, allowing it to offer a competitive product experience while maintaining a decentralized architecture.

Technical Architecture of DYDY V4

dydx v4 is being developed as a standalone blockchain based on the Cosmos SDK and Tendermint Proof-of-stake consensus protocol.

This architecture allows for a fully decentralized, off-chain, orderbook and matching engine capable of scaling to orders of magnitude more throughput than any blockchain can support.

In dYdX v4, each validator will run an in-memory orderbook that is never committed to consensus (i.e., off-chain). Orders placed and cancellations will be propagated through the network similar to normal blockchain transactions, ensuring that orders placed and cancellations will always make their way through the network. The resulting trades are then committed on-chain each block.

Conclusion

AppChains represent a paradigm shift in the blockchain space, offering a high degree of customizability for specialized use cases. This is exemplified in the case of dydx, which has leveraged the unique capabilities of AppChains to tailor its blockchain environment to its specific needs.

While Layer 2 rollups are evolving rapidly, they currently fall short of providing the level of customizability that AppChains offer. Furthermore, many of Ethereum's Layer 2 rollups are not yet fully decentralized, which contrasts with the inherent decentralization of AppChains.

However, the future of AppChains is not set in stone and will largely depend on the evolution of rollups. If rollups reach a point where they can offer highly customizable environments while maintaining the security of a robust Layer 1, AppChains may lose their unique value proposition.

But that day is not yet here. The blockchain space is in a race to find the sweet spot that offers maximum customizability without compromising decentralization. As this race continues, AppChains stand as a compelling solution for projects seeking to tailor their blockchain environment to their specific needs.

That's it for this week. See you next Sunday!

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