Introducing Token Exchange
The First Layer 1 Exchange on IOTA & Shimmer
With the Soonaverse Token LaunchPad kicking off on May 24th, the IOTA community can expect plenty of new tokens entering the ecosystem. The Soonaverse through its many different performant modules has proven itself to be a reliable testbed for prototyping software that will be deployed on the Shimmer network. The problem we face with these new tokens that launch on the platform is that there’s no decentralized exchanges (DEXs) or centralized exchanges (CEXs) for them to be traded on. Until now.
Unchained Tech, Shonuff Marketing, and Reengineered Finance LLC have come together to develop the very first 3rd Party Service Module, the Token Exchange. As explained in the Shimmer $SOON article, new service modules have an overwhelming impact on the power of the platform. This service module in particular is vital as it will begin as a centralized exchange (CEX) built on top of IOTA and will allow users to freely buy and sell tokens that are minted on the Soonaverse.
The module becomes even more powerful after Shimmer goes live because the CEX will give people the opportunity to own and trade their assets on the L1. This is something that has never been developed in any ecosystem. An exchange with no base layer transaction fees and no initial liquidity requirements. The design of the Soonaverse allows us to implement this feature without relying on smart contracts, securely, in a process familiar to Soonaverse users, and creates immediate utility for token holders, something that will only increase once Shimmer goes live.
While this may seem like a simple OTC exchange, it’s so much more. The Soonaverse payments engine and the direct link to the IOTA network make it possible to use the exchange without needing to deposit your capital into an account that you don’t control. The only time your assets leave your possession is during the trade execution just like when you buy an NFT on the marketplace. This makes it possible to do some cool innovating right now and some extraordinary innovation in the future…
The Current Build
After developing the NFT MarketPlace it became clear to Adam Unchained and the team at Unchained Tech that they could easily enable token trading with the same battle tested framework used for NFTs. Adam Unchained recruited Reengineered Finance and Shonuff Marketing to bring in area experts to complete the product and design. The result was an entirely new kind of exchange that is only possible on the IOTA and Shimmer networks.
The process is a familiar one to Soonaverse users, tokens are minted through the LaunchPad and distributed through token sales to users. Users create bids (e.g. SOON/IOTA), buyers respond to those bids (e.g. IOTA/SOON) in a similar way to how NFT resales are done. The IOTAs are always in the control of the user except during the execution. If all a user does is fill an open order, then the period of centralization in the exchange is only 1–2 milestones (less than 20 seconds).
There will be three types of tokens: Tokens not made for public sale, tokens in public sale progress, and tokens where the sale is finalized. All of these tokens will be able to migrate to either Shimmer, IOTA, or the Shimmer EVM once they’re released. But even before Shimmer is live, all the tokens that finalized the public sale can be traded if they are listed on the exchange. People who own a token that’s listed on the exchange will be able to make it for sale and people who are interested in buying can buy. Similar to what you see on an OTC exchange.
All of these buys and sells (bids and asks) are constantly being created by individuals. The efficient payment engine then fulfills these orders, both partially and fully. All done in real time. If one buy can fulfill multiple sells or if one sell can fulfill multiple buys, then the order will be separated out as individual transactions on the Tangle. So if someone posted an order looking to sell tokens and it gets partially filled and the partial funds are automatically sent to the seller. This means that payments aren’t batched and the only funds that were held on the system were the ones in the open order waiting to get filled. All other transactions are immediately passed through.
Creating a buy or sell order, instead of fulfilling an outstanding order, has time constraints. The order will only be open for 3 days. After that it’ll be automatically canceled and funds will be refunded to the wallet that posted the order. The user can then repost their order if they’d like to.
The most important part for SOON token holders is that this is a 3rd Party Service Module, which means a portion of all fees generated are automatically sent to the Soonaverse vault to be used for buying SOON tokens off the open market and distributing them to SOON token stakers once staking begins. This 3rd Party Service Module will be allocating 20% of all fees generated to the Soonaverse vault. The fees generated will continuously accrue in the vault even before the staking mechanism has started.
L1 Exchange vs. L2 DEX
Both an L1 Exchange and an L2 DEX have the same goal: Take a certain amount of one token and exchange it for a certain amount of another token. The way each exchange gets this done is quite different. Let’s walk through some of these differences.
Timing
Users will be able to immediately use the L1 Exchange and don’t need to wait for smart contracts. Trading will be available right after the May 24th SOON token sale is finalized. Even after Shimmer launches, it’ll still be some time before smart contracts are released and the Shimmer EVM is available for DEXs to be usable.
Initial Capital Requirements
Initial capital requirements for creating a trading pair are significantly lower on an L1 Exchange compared to a L2 DEX. To establish a token trading pair on a DEX, the project will need to come up with a few hundred thousand dollars worth of LP tokens at a minimum to make sure large trades don’t cause significant slippage. This is a stark contrast to the much smaller listing fee to get a token trading pair set up on the L1 Exchange. These lower capital requirements will be very attractive for projects that would rather use their funds for activities like development.
Please note that incentives like liquidity mining (giving away tokens to reward people for providing your token’s liquidity on a DEX) can offset upfront costs.
Slippage
Slippage is the difference in price from what’s quoted and what’s actually received. With the L1 Exchange, there is no slippage. If a token has outstanding orders and it’s selling for $3.50, then the buyer will pay exactly $3.50 per token. On a DEX, slippage is heavily dependent on the amount of liquidity in the pool. If there’s only $200,000 worth of liquidity in the pool, a buyer is quoted $3.50, and they try to buy $10,000 worth of the token then the price they actually bought at will be $3.80 resulting in around $800 in lost value due to slippage.
Speed of Execution
Even though there may be slippage due to low liquidity, a trade executed on a DEX will be finalized within a few seconds every single time without fail. When a user is buying there’s always a seller on the other line and vice versa. This is people the user isn’t selling to another person, they’re selling to a smart contract. That’s not the case with the L1 Exchange. To have a trade executed immediately, there needs to be an open order. If there’s not an open order then the user needs to post an order of what they’re looking to buy or sell and wait for someone to pick it up.
Blockchain Fees
To use a DEX, you’ll need to wrap your assets onto an L2 chain (i.e. Shimmer EVM). Doing this means every subsequent transaction while on the L2 chain results in a blockchain fee. The beauty of the L1 Exchange is that it will forever remain on the L1, so there will never be any base layer transaction fees.
Forever Centralized?
You may be wondering why decentralization wasn’t a factor mentioned above. That’s because the L1 Exchange we’re building will have all the hooks in place to transition into fully decentralized infrastructure. The current version of the L1 Exchange has a centralized execution mechanism, but that won’t always be the case.
We will be working on completely changing that through implementing support for TIP-42 — “6.2 Open Swap with L1 Outputs”. With the introduction of new output types and feature blocks we can leverage the amazing Stardust upgrade to deliver a fully decentralized OTC style exchange on the L1 without the need of going to an L2 chain. This results in a more decentralized exchange, free from chain fees, and increased security. We’re currently working with IOTA Foundation to implement TIP-42 once Shimmernet and Stardust have been delivered over the next several weeks.
The three of us (Adam Unchained, Shonuff Marketing, and TangleAccountant) love IOTA technology, we love how it works, and its feeless nature. We are very passionate about taking advantage of all its key features and aligning our UX experience with it, enabling end users to deliver the next generation technology that will compete and innovate across the whole crypto space.
For us, the Token LaunchPad was always only half the equation. It gave projects the ability to create tokens, but users wouldn’t be able to do anything with them as we wait for Shimmer EVM to be completed. The Token Exchange now turns the Soonaverse from just a token generation and capital raise platform to an entire token marketplace. This service module transforms the Soonaverse DAO-on-Demand service into a DAO Market platform, with completely liquid assets (NFTs and tokens). This represents a new era for the Soonaverse, one that opens the doors to open source development through the Service Module model. We hope that the entire development community in and outside of the IOTA “bubble” will embrace the full potential of the Soonaverse platform and buidl with us, the entire SoonLabs team, and community. LFGO!
