The Many Innovations of O3 Interchange
If you’ve been following O3 Labs, it’s likely you’ve heard that we’ve been focused on building a cross-chain decentralized exchange (DEX) called O3 Interchange. Maybe you’ve used our product, O3 Swap, before. Maybe you’ve used a DEX like Uniswap, Pancake Swap or the countless other DEXs on the market. What we’re here to tell you is that O3 Interchange is going to be unlike anything you’ve seen before in that it will allow users to swap asymmetric digital assets across chains, not just bridge symmetric assets. What that means is that on O3 Interchange, you’ll be able to swap token x on chain A for token y on chain B in the same trustless, seamless manner that crypto traders have come to love on DEXs. How will it do that you might ask? After all, when you bridged token x from BNB chain to Polygon that one time, you received token x, that is, the same exact token you sent. (In reality, it’s not the same token but rather it’s a symmetric token that’s built consensus on more than one network. But no matter…)
The answer to the question we’ve just proffered lies in O3 Swap’s history as an advanced aggregator which sourced liquidity and trading requests from DEXs on the source chain before bridging to another chain. Connecting users to the best DEX-based exchange rates was our bread and butter on O3 Swap thanks to the O3 aggregator that aggregated on the source chain to provide the best swap path for users. With O3 Interchange, that same aggregator will be brought back to enable users to amass liquidity on not just the source chain, but also on the destination chain as well. What that means is that users of O3 Interchange will have the power of not one, but two DEXs in their hands with each and every swap. Through aggregating multiple DEXs on each chain, users are able to get the best price for their unique cross-chain swap.
But, here’s the thing; that’s just one layer of liquidity on O3 Interchange. O3 Interchange will have two such liquidity layers; one being the aforementioned DEX liquidity from the O3 aggregator and the other coming from our very own automated market maker (AMM) liquidity pools. Our latest cross-chain liquidity pool model on Interchange is exactly what will make O3 Interchange a true cross-chain DEX because we’ll deploy these token pools ourselves with O3 users both providing native asset liquidity and balancing the native tokens they provide with their own ptoken (cross-chain soft asset) equivalencies. For example, the Eth pool will have both Eth and pEth while the USDC pool will contain USDC and pUSDC, and so on and so forth. Each of these pools will reside on different chains to make cross-chain swaps possible. What these pools allow O3 Labs to do is to open up our entire process of minting and burning substitute ptoken soft assets for scrutiny, so our protocol is both transparent and decentralized, just the way the first blockchains were designed to be. O3 Labs will not mint the ptokens to balance the pools. In fact, users themselves will mint these soft assets in order to take advantage of arbitrage opportunities within the pool. No other cross-chain project has done this before at scale and Interchange’s trustless, decentralized approach is what makes O3 Interchange truly special.
Furthering the trustless nature of O3 Interchange is the fact that users will always receive native assets when crossing chains due to the robustness of the aforementioned token-ptoken liquidity pools. This feature is based on the tried and tested Curve AMM model which has been thoroughly vetted by the likes of other DEXs who’ve also used this model. The model is important because native assets have consensus on the blockchain unlike the ptokens or any other tokens minted by 3rd parties. In fact, users will never interact with these ptokens unless they’re doing so on purpose to take advantage of arbitrage opportunities within these pools. These soft assets merely act as a middle man to get our users the native tokens they desire, but remember, our users are minting these ptokens themselves, so O3 Labs does not mint ptokens and therefore cannot be said to be the crypto space’s dreaded middle man. Instead, users rely on other users to take charge of the ptoken. Thus, Interchange’s mechanism will demonstrate a true peer-to-peer approach to exchanging assets. Another advantage of O3’s users receiving native tokens is that they’re interoperable and can be taken to any other platform to farm for yield.
The strengths of Interchange don’t just stop there though. Interchange will also take the lead when it comes to the utilization rate of assets within the AMM pools and subsequently the $O3 tokenomics. It will do so via a rewards equation that takes into account the trade volume for the pools’ tokens in calculating the APY offered to users who provide liquidity within them. This optimization of assets is easily encouraged using a specialty math formula where the pools’ $O3 token output is equal to the total incentive output multiplied by the pools’ specific volume weight percentage (TokenIncentive=TotalIncentives*PoolVolumeWeight%). Essentially, what optimizing the utility rate within the pools means for users is that $O3 token rewards for pools won’t be given out equally but rather will depend upon that pools’ utility as determined by the tokens’ trade volume which generates revenue for the protocol. As a result, our protocol won’t waste mined $O3 tokens because most of them are rewarded to the liquidity providers who are really helping cross-chain trading take place. Gone are the days where a high TVL goes wasted while the token supply inflates wildly. Instead, the incentives are aligned for our holders, liquidity providers, and users so new $O3 tokens will only be minted at a higher rate if the trading volume of those tokens within the pool is particularly high while the total output of incentives will not change. This new model protects our tokenomics in advance of the long awaited utility of $O3 token in $O3 DAO.
Finally, Interchange will also be exceptionally scalable and capable of quickly supporting new assets and blockchains due to our model that includes aggregation and liquidity pools on multiple chains. Supporting new assets will merely require deploying new token-ptoken AMM pools on-chain before enticing liquidity providers with $O3 rewards. Users of O3 Swap continually asked us to add new tokens and chains, but based on the old code base it was impossible to do this quickly and safely. Our latest AMM pool model for facilitating secure swaps was first popularized by Uniswap and Curve, so it’s tried and tested. The innovation lies in using the model to support cross-chain transactions. Supporting new blockchain networks will simply require connecting to the top DEXs on that chain in addition to deploying the most in-demand liquidity pools to facilitate trading. For clarity, supporting new chains and new tokens for the Bridge only requires deploying the most in-demand liquidity pools, and aggregating DEXs is not a necessary step for the bridge module but is all-important for the swap module. With that said, DEXs are usually excited to work with us as we bring trade volume and liquidity to their Dapps too via our aggregate services. This just goes to show that our AMM pool and aggregator model can scale up with even the best-in-class cross-chain protocols. On the network side, O3 Labs has already been contacted by a handful of worthy EVM compatible chains that want us to deploy on their networks.