Pontem x Econia Livestream Recap

For this Waterside Wednesday, we have special guest Econia with us on our livestream.

Alejo: Thanks for coming on! Please share with our community who you are and what you’re building.

Econia: Thanks for having us! I’m the cofounder of Econia Labs and the author of the Econia protocol, which is an on-chain orderbook for Aptos. The order book and matching engine are completely on-chain, which means 100% transparency for the financial information related to the DEX platform that we’re building.

We are an autonomous settlement layer, written in the Move language and deployed decentralized all over the world. We leveraged some of the performance enhancements offered by Aptos and Move language to build a DEX we couldn’t really build anywhere else. We have a couple features ranging from custodian capabilities to underwriter capabilities which allow us to support things like margin trading and derivatives. Econia’s matching engine treats derivatives and generic assets as a first class citizen and matches them all the same. We’re currently integrating a couple of early dApp developers. We’re excited for the next generation of DeFi infrastructure that we’re helping to build out on Aptos.  

We support everything that traditional order books support, like market orders, limit orders, specifying restrictions, set min/max base, min/max quote, and more. It’s completely transparent, everyone can know by just looking at the blockchain what the status of the order book is. Everyone can know what’s in people’s accounts and every order on the order book is backed by the assets. We don’t have the obfuscated leverage issues that we’re seeing again and again with centralized exchanges’ dynamics. We open the door for increased participation too. With Econia, anyone in the world can participate as long as they have an Econia application. Anyone can trade any asset they want with anyone else.

Alejo: Why aren’t we all using this? What are the barriers to adoption? I know you’re not live yet, but once you are, how do we get as many people as possible using this as opposed to these opaque intermediaries?

Econia: Step 1 is to ship it. We’re starting our audits this week. Once we’ve done a little more unit testing on the implementation, we’re going to be publishing on devnet and testnet to get integrators ready to start building their apps on top, like Pontem and others. We’re going to be working with institutional market makers who want to provide liquidity on the books.

Moving forward, we’ll support anyone who wants to build apps. And then more broadly, getting people into crypto. It’s our job to demonstrate that we are presenting a reasonable alternative that does not have opaque, over-leveraged, fractional reserve activity going on. We plan to grow the community organically. The people who can’t participate in the traditional system are empowered by crypto, and bringing them on is important.

Alejo: It’s pretty incredible to me, because this is somewhat the promised land. The reason we’re building on these smart contracts and decentralized computers is so we’re able to create more decentralized infrastructure that’s transparent, that should be theoretically safer for people to use. Obviously there are smart contract risks, but once you get beyond that, this is the mecca of where we want to get to. I think trading applications are definitely the first step and maybe we’ll see more decentralized versions of existing applications. Is there something about Aptos that enables your solution to exist, whereas before it couldn’t?

Econia: Yes, I love to frame this in the evolution, of how blockchain has come so far. I agree we’re on the verge of a computing revolution, kind of like what happened 50 years ago when we first got computers that worked and then we started networking them together. Now, we just have one distributed computer where all the information is verifiably correct between all the different ones. The premier use case for this was bitcoin in the beginning, just tracking who owns what, and the value in it was that it was decentralized. It didn’t have a ton of use cases beyond that. Ethereum was a real paradigm shift because the value is a resource on a trusted financial computer. We always have these questions about ‘What is the value of something?” And the answer tends to be “what we assign to it.” Why is gold valuable? Sure it’s useful for manufacturing semiconductors, but mostly everyone thinks it’s valuable.

Everyone needs computers and everyone needs to track who owns what. There’s so much to keep track of, especially with these trading applications, which is why I agree with you that the trading platform is the premier use case of this. I think this might be Ethereum’s greatest success, creating a decentralized trading venue that anyone can use. It’s completely transparent and the algorithm is well-known. It’s trusted and credibly neutral, which is something you can’t say about centralized institutions like JP Morgan Chase, who can be swayed by governments, people, and other third-parties.

Solana was another evolution beyond this. It proved that blockchain reached this high execution speed. In my opinion, Solana, Aptos, and some others are in a world of their own because they change the scope of what you can do. You can enable more complex applications: the main two current examples are NFTs and DeFi, but there can be more applications beyond that. One of the foremost predecessors to our Econia model is Serum on Solana. It was another on-chain order book that proved you can do this on-chain. It just had a couple of technical inefficiencies that we found we could reconcile, including how it splits transactions.

We don’t have to do that on Aptos because of the Block-STM, which allows us to compress everything into a single transaction. This is our killer feature unlocked by Aptos: we have an atomic matching engine. The word ‘atomic’ comes from database theory systems, where atomicity refers to a transaction that either executes or doesn’t execute at all. In Econia, your market order settles immediately in that transaction, which allows for finer composability because you can immediately take the proceeds of a transaction and route it through to something else like a liquidity pool. The possibilities are endless inside of the VM composable primitive. You can chain together with other things to build programs that leverage all the little building blocks together to make something even more complex.

We are at a watershed moment of what you can do on-chain and with a financial computer. or us, the order book is the premier application of that because this is how we decide what things cost. Again, deciding what something is worth is kind of a philosophical question, but in the order book, you can clearly see how much someone is willing to pay for something. The effect is that the order book is this emotional synthesis tool, because you have all these primates putting their decisions and judgments into this one thing, and the result is a price. In the end, we’re really just helping people figure out how much things cost, which is important for allocating resources in the world and we do view this as the future of the financial system.  

Alejo: And to bring this back full circle, bitcoin alone isn’t connected to anything, other than through centralized exchanges. That’s what ties value to bitcoin at some arbitrary measure of value we all agree on.

Now, this pricing mechanism can be brought on-chain and we no longer have to trust centralized intermediaries off-chain on what something is worth. We can now go on-chain and transparently see what everyone else values something at. In my opinion, it’s almost like we’re going back to this barter economy, and because it’s on-chain and transparent, it’s more efficient than the economy that exists today where we have to go through local fiat currency. This price discovery mechanism,you could argue, could be a more inefficient way for liquidity providers, but it’s now possible on Aptos.

It’s super cool to hear you pioneering this and bringing it over to Aptos. One question that popped into my head: is it all going to move on-chain? Is it possible that all of these activities go on-chain and we no longer have to worry about off-chain activities? Can we trust everything to the blockchains?

Econia: Before I answer that, I want to talk about a few things first. You talked about bitcoin being a trigger asset on-chain. I agree that it’s somewhat unique because with bitcoin, there’s no two-way bridge in the same way I’d bridge Ethereum and Aptos for example, because bitcoin doesn’t talk with anything else. So you’re dependent on the centralized exchanges. Also, bitcoin on Ethereum is actually a single party and I’m not exactly sure who wraps that. That raises the question of what is a bridged asset? Wrapped bitcoin on Ethereum is a promise from this intermediary that if you say you want it, they’ll actually make you hold your bitcoin on the other side. I think that with bridges, more broadly, this is what we want to view them as. This is a promise that you’ll get the thing on the other side.

It also makes me wonder  what we should be viewing stablecoins as. Ideally, if you wanted to move stuff across chains, you would start with an asset on one chain and then go over to the other chain and you wouldn’t hold anything over the bridge, you would use it for that one trusted transaction. It’s like you’re helping someone cross the street and no more than that. Otherwise, it introduces a whole other level of risk. It also raises other interesting questions, like should wrapped bitcoin trade at a discount because you don’t necessarily have the same security guarantees? Or should it trade at a premium because then you can lend it out in DeFi? But we are entering this universe of connected blockchains, which I do think makes it easier to bring everything on-chain now, to answer your question. As soon as it becomes more efficient or it’s less expensive to trade something somewhere else, now you just immediately go there. It’s ideal that the resources aren’t going to be locked into one place.

As for everything being on-chain, whether you can buy your Starbucks coffee on-chain, while at the same time someone else is trading on the same chain, that I’m not so sure about. In the immediate future, I think we will have a lot of transactional throughput increase, but ideally the end goal would be that you can sell anything on-chain. One of the more near-term solutions I would expect to see is that financial institutions across the world start to trust DeFi as the actual central authority, even though it’s not centralized. I think that in the near term, on-chain asset tracking is going to become de facto because everyone is going to see it’s transparent. They don’t have to trust some hidden ledger from a third-party, you can see everything on-chain. I think that presents a really compelling alternative to the non-transparency we’re seeing in traditional finance.

Alejo: You bring up a lot of good points. I do agree that we need to increase throughput in order to put everything on-chain. What’s your take on whether some of the scaling solutions we’re seeing on Ethereum, like Optimistic Rollups and ZK Proofs, could potentially help scale the throughput? As we are dealing with these challenges of scalability, do you think Aptos can also scale in abstracted layers and does your solution maintain its same functionality in those?

Econia: Scaling is obviously important. A great part about Aptos is built-in upgradeability. You have to make some foundational decisions in the beginning, and most things can then be changed along the way. The proof-of-stake merge was an amazing engineering accomplishment. It was changing everything mid-flight on the system, and it worked. But they didn’t provide that much of an increase in the TPS. Going forward, is everything going to move on-chain? What’s it going to take to support that?

If we were to move everything on-chain, we would need to think about what when something like, say, Facebook says they’re going to use a public blockchain and they’re going to settle things on it. You now have millions of people sending each other micropayments. That is not 10,000 TPS. It’s way more. It’s been the story of Web2 over the last few years: who can take in the most traffic and load balance everything you’d need to support transactions per second. If we’re going to be moving everything to Facebook, I don’t know if that’s something we can do on-chain. I think it comes from different layers. First, it’s the financial activity in the world that we view as a very high priority to be all agreed upon.

Alejo: I agree with you that necessity dictates innovation. For monetary applications, we need to move away from centralized institutions. But maybe things like social capital, we can trust Twitter and Facebook to own those for us and maybe combine some form of permissioned plus permissionless blockchains. Imagine Twitter can be a trusted node for likes, and those likes can then be traded against Ethereum and others. So as you’re settling your likes for Ethereum, that’s done on-chain on a public permissionless chain, but they could scale internally through their systems. The throughput isn’t there yet, but maybe in the future.

For me, ZK is also some form of black magic that only 10 people in the world really understand. It really is something that will hopefully get researched more as we continue to develop the space. I was talking to someone that is working on Zero Knowledge and on the application of it on something like Starkware. It seems super interesting. There’s going to be this Layer-3 hyper scalability where each individual application can have its own “chain,” and scale theoretically to 100,000 TPS or more. Therefore, each application can have their own independent throughput. They only share the throughput when they checkpoint on Ethereum to settle. It seems like this Layer-3 may be a good scaling solution. For example, Econia might get 100,000 TPS on their own, so can Pontem and Liquidswap, and the combination of them when they settle on a Layer-1 is when you transact or have to pay the gas fees accordingly.

Maybe that is an interim solution, but it sounds like it's still in development. It’ll be cool to see how it’s applied and actually put into practice. It’s very interesting to be at the forefront of this. It feels like a trope to say crypto and blockchain is like back when the Internet was created, but it really is like that. If you look around and a lot of the stuff isn’t fully working, and if it is, it’s super slow. It’s exciting that it’s because of people like us that this space keeps moving forward.

Maybe we could dive more into the roadmap of Econia. Please give the folks here an idea of what’s coming.

Econia: We finished the implementation just last night, so what comes next is some internal testing and we’re going to audit. We’re going to audit with three separate auditors so that we have triple redundancy. That’s going to take a couple of weeks.

Then, we’re going to be launching the smart charts, and updating the documentation of all the APIs to support integrations building on top and also the professional institutions, market makers, and everyone interested in providing liquidity. We’re planning on launching Econia under a multisig contract. When Econia launches, it’s going to have some ability to tune some parameters over time as we get the DEX up and running.

In the beginning, Econia is going to accept APT as a utility coin. This is like how on an L1 you need a kernel resource to provide DDOS in the network. There will be an Econia token that then takes over. Long term, the use of the Econia token is going to  be this pulse. We’re just trying to figure out which form to get started on. We actually got community input, and we want to have this be a community-directed project because we just write the protocol that ties together all of the interests and incentives. Really, the decision is up to the life cycle of the project.                                     

Alejo: I’m excited for that and maybe we could touch a little bit more on how the community plays into this. We’re excited to integrate with Econia and enable this use case of shared liquidity pools with a central limit order book. It seems that the best application for this is long term assets where price discovery is a little bit easier on shared liquidity pools. There’s also the ability to have passive liquidity provisioning, so people don’t have to think about placing orders as market makers which makes it more accessible.

We’re excited to build with what you’re creating. How can builders, users, and individual contributors be a part of Econia?

Econia: Be on the lookout for the form we’re creating to get concessions going on. What we want the protocol to become, how we want decisions to take place in the future, and what kinds of things we want the coin to be used for. I’ve definitely done my share of outreach events like this. We want to make sure that the community is involved with the project and knows what Econia is for, what it does, and how they can engage their favorite dApps that integrate. Then we can support those dApps when they do want to integrate. We have a lot of exciting things going forward.

‍Alejo: I know we talked about asset agnosticism and what that means. It looks like in the interim, NFTs are really hyped up on Aptos and Solana, so maybe we could talk about some of the use cases. Definitely, as you mentioned, perpetuals. But I personally am interested in how I can trade my Monkeys with APT in a more decentralized way. Maybe you could indulge my NFT curiosity.

Econia: There are a couple of ways we can support this. I’ll start by explaining how Econia supports generic assets.

Econia accepts a coin as  “quote assets.”. This means, what is it denominated in? Oftentimes things are priced in USD, but in this case, it’s going to be a coin. But the base asset can be whatever you want. It doesn’t have to be a coin. And so the way we regulated the amounts thereof is by having an underwriter for our market.An underwriter is someone who registers with Econia, toget a capability, which is kind of like an off token. It allows them to certify the base asset that’s generic in someone’s account. Then, they can choose whatever they want. So when it comes to NFTs, we have two examples.One is the semi-fungible release collection. If there are 10,000 of an issue in an NFT release, and they are identical, you can trade it in the order book the same way you trade coins because they’re one for another. But if you want to have only one, you can fractionalize that and trade the shares on Econia as a generic asset. That’s one of the premier use cases we’re seeing. Order books are traditionally designed for something that is fungible, so in this case it’s going to be a scarce collection of an NFT that are identical to other ones, or it’s shares of the same NFT.    

We’d like to thank Econia for joining us today on our livestream! Check them out on social media to keep up to date with their project. Follow Pontem on Twitter, and join our Discord and Telegram chat in order to get the latest Pontem x Econia news.