Moonshine has always been about building delightful working software over making promises about the future. With that in mind we've spent the last few weeks focused on building and simple automated market maker that runs on the Ethereum layer 2 network Arbitrum (more on what that means later). While it may seem like this is a major change in direction the overall focus has not changed: to be the most efficient cross chain decentralized exchange in the world.
Currently Ethereum is slow and expensive. Transaction can take hours to confirm and during peak usage transactions can cost upwards of $100. Everyone knows this needs to be addressed and it will be the question is just how. There are hundreds of blockchains that are popping up with cheap instant transaction and some are beginning to gain traction. Solana is probably in the lead and just raised an additional $314M to scale their operation. Polkadot, Binance Smart Chain and Avalance are also all in the running. But the majority of blockchain users remain on Ethereum. One of the simplest explainations of why that this is the case is because there just aren't very many blockchain users who are using blockchains natively yet. User have also stayed because that's where the majority of the capital and liquidity are.
In addition to other blockchains, layer 2 networks are starting to emerge as well. One of the first layer 2 networks was the Bitcoin lightning network. The idea as that people could “deposit” their Bitcoin onto the lightning network and then transact cheap and instantly with other users on the network. When they were ready to “cash out” they could withdraw back onto the Bitcoin network. People have started to build layer 2 networks for Ethereum as well where users can deposit and withdraw any tokens they like. The two main contenders in the space are Arbitrum and Optimism. Both networks offer instant transactions and significantly cheaper fees.
It's still unclear how exactly all of this plays out from here. The Uniswap community voted to launch on Arbitrum although Uniswap's founder Hayden has also said he's excited to launch on Optimism as well. It’s unclear how liquidity will be split between those chains. It's also unclear if Ethereum will continue to be the leading blockchain platform or if another chain will take its crown.
So where does all of this leave Moonshine and why have we decided to deploy to Arbitrum? Our bet is that in the future there will be multiple smart contract platforms and potentially multiple layer two networks running on top of them. There will also be application chains that run their own distributed ledger. Application chains will enable users to make use of an application without having to pay fees to and underlying rent-seeking smart contract platform. Also, they won’t suffer from fragmenting liquidty across chains which will help them prevail over single chain applications.
Compound chain is the first example of an application chain launching in the wild but we will see more emerge in the coming months. Compound chain will allow users to borrow assets on Solana against collateral on Ethereum. Similarly, on Moonshine chain you'll be able to trade tokens on Solana with tokens on Ethereum.
The majority of the liquidity will reside on the Moonshine chain but there will liquidity deployed to the child chains as well. This will allow smart contracts on those chains to interact directly with the liquidity. The parent chain will the automatically arbitrage those native markets to keep them efficient. The automated market maker deployed to Arbitrum will be the first of those native markets.
So what focus on a native market instead of continuing to build out Moonshine chain? Over the past year we've built a working standalone blockchain which has organically pulled in $100K of liquidy without having any money to spend on marketing. The next step, bringing Moonshine from $100K in liquidity to $1M in liquidity and beyond will require that Moonshine is sufficiently scalable and decentralized. Building a fully decentralized scalable blockchain network requires a signifiant amount of capital and comes with lots of risk. When we release a native market on Arbitrum it will be fully scalable and decentralized on day one. If we offer a nearly identical user experience and don't have to focus on decentralization and scale we can put 100% of our focus on building liquidity and volume.
The way to build liquidity and volume is to get as close as we can existing liquidity and offering better incentives. How will we offer better incentives if Uniswap already has billions of assets under management? There are a few things we're working on but the first is a fee subsidy drip. The fee subsidy drip will be a pool of ETH that subsidizes the AMM on Arbitrum. That pool is funded by a “drip” of Moonshine tokens meaning a small amount of tokens that's issued each second which is then automatically traded on the exchange for ETH. We won't be able to beat Uniswap on larger trades but on trades where gas price is the differentiator we can start to gain traction. DEX aggregators can also bring in volume as well if we're listed as a cheaper trade to them. Once we've gained significant traction we can build markets on other chains and bring the focus back to making Moonshine scalable and decentralized.
As always we love hearing feedback about our plans and the product! Feel free to swing by the Telegram room and say hello!