The future of web3 is modular. Our thesis projects a future world of 1000+ app-chains, rollups, and rollapps will shape the blockchain ecosystem. The app-chain thesis is starting to materialize already, with popular Ethereum dApps such as dYdX moving to a Cosmos app-chain and dedicated modular infrastructure supporting rollups such as Celestia. Furthermore, the ever-growing group of Ethereum rollups are lacking heavily in interoperability due to the lack of a native interoperability protocols (such as IBC), even though they share the same DA, Settlement and Consensus layer. There are several projects working on bringing trust-minimized interoperability to these as well.
Thinking ahead in this novel modular world, a new set of challenges will arise because of two main dynamics: 1. A growing number of networks resulting in a fragmentation of communities, liquidity, and user attention; 2. The networks being interconnected in an asynchronous manner. These dynamics of the modular world result in the following pain points for DeFi participants:
- Cross-chain MEV — When conducting cross-chain transactions, traders are susceptible to relayers and external network validators extracting value via the ability to rearrange transaction order
- Poor interoperability standard–users rely on slow and clunky third party bridges for moving assets between chains and often lack the liquidity and fungibility with the native token standard on the source chain; bridges have historically been susceptible to hacks
- Poor execution for traders — liquidity fragmentation as a result of the number of networks grow, isolated pools on separate chains will lack liquidity depth and have a higher price impact, negatively affecting trader UX; lack of cross-chain smart order router
- Difficulty managing capital for LPs — given the greater number of chains each with their own DeFi dapps, it becomes increasingly difficult to manage capital as an LP in an efficient manner, as well as an increased frequency in cross-chain bridging which compounds risk
Presently there are numerous protocols building infrastructure that solve for cross-chain interoperability and MEV. Protocols building chain-agnostic IBC (Inter-blockchain Communication) include the likes of Polymer, Hyperlane, Dymension (escrow IBC), which provide the rails for seamless interoperability and composability for rollups, app-chains and L1s. Protocols addressing MEV in the modular world include Skip, Duality, Flashbots and Mekatek. Shared sequencing and settlement layers also address some of the interoperability and MEV challenges. However, not as many true cross-chain DeFi protocols leveraging this infrastructure to address poor UX and execution for end users such as traders and LPs.
We define true cross-chain DeFi as when transactions originate from one network and settle on another, while retaining a similar UX in terms of composability experienced on a monolithic execution environment. Shogun’s Decentralised Interchain Market Maker (DIMM) is one of the first true cross-chain DeFi dApps that aims to address poor UX and execution for traders and LPs in the modular world.
In addition to IBC, Shogun will leverage Interchain Accounts (IA) — a module that works to expand beyond the current iteration of interoperability that IBC has enabled, which is limited to the transfer of tokens between appchains. IBC combined with IA opens up a myriad of possibilities for native DeFi interoperability between connected blockchains and is poised to address many of the challenges for DeFi users, including liquidity fragmentation and poor UX. Some examples of composable cross-chain transactions, known as IBC/ICA money legos, are illustrated below:
Dynamic LP Management
Cross-chain Borrow/Lend Strategies
Conclusion
Shogun’s cross-chain market making modules offer superior UX for traders and LPs in that the complexities of cross-chain bridging and liquidity management are removed for the individual. Our flagship product, the DIMM (decentralised interchain market maker) uses IBC and interchain accounts (ICA) to run automated logic for dynamic rebalancing strategies by utilizing any available on-chain liquidity for hedging, and LPs can set and forget while earning fees and rewards. In summary, DIMM solves the challenges of interchain liquidity by providing capital-efficient market-making services, automating dynamic rebalancing strategies, and removing the complexities of cross-chain bridging and liquidity management for the individual.
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