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IDEX — What is Layer3?
Alex Wearn
IDEX

Published in
IDEX
On Monday we unveiled our plans for the next version of IDEX, a Layer3 derivatives exchange. But what exactly does that mean? Do we really need one more layer? And why does this matter to you, the trader?

Ethereum Scaling in 60 Seconds
Layer1
The Ethereum network. The most secure way to transact as every node in the network executes every transaction. This redundancy comes at a cost, which is why transaction prices are measured in dollars.

Layer2 (Arbitrum, Optimism, ZKSync, etc.)
These networks sit “on top” of Ethereum. Transactions are settled to ETH L1 in batches, periodic checkpoints which, combined with published transaction data, contain all of the information necessary in ETH L1 to prove that the latest checkpoint is valid. This batching lowers costs ($0.30–0.60 range), but with the trade off that individual transactions are no longer processed individually by the L1.

Enter Layer3
The basic premise behind Layer3 is simple; push even more of the activity off-chain to reduce the cost of transacting, but without significantly affecting the security of transactions.

IDEX’s derivatives exchange platform consists of two major L3 components:

Matching & Execution
The trading engine of a perpetuals platform is extremely resource intensive. At peak times, trading engines process thousands of orders per second, while low-latency APIs enable market makers to quote as deep and as tight as possible. Running this type of infrastructure on-chain requires major trade-offs in cost, performance, and throughput.

The solution is to keep the trading engine off-chain in the app layer, but require every action to be accompanied by a signature from the trader’s wallet. The blockchain network only processes the most critical part, trade settlement, ensuring that all fund transfers have explicit approval but without resulting in any hit to performance.

Custody & Settlement
The smart contacts custody all collateral and verify the settlement of every trade. Order book DEXs are sensitive to settlement costs due to the nature of trade matching. A single trade could result in 10s or 100s of settlement transactions, while, in comparison, a swap against a pool results in one single settlement transaction regardless of size.

The solution to further reduce settlement costs is to store transaction data off-chain. Recall from the L2 primer that settlement involves posting both the state of the latest checkpoint and the data of all included transactions. The majority of the costs associated with this are actually due to the inclusion of transaction data. Posting this data elsewhere, generates another 50x improvement in settlement costs.

IDEX Layer3 — Launching Summer 2023
IDEX’s L3 solution represents an important step forward for decentralized exchanges and the broader DeFi ecosystem. By leveraging L3 solutions, decentralized exchanges like IDEX can significantly improve the scalability and efficiency of their platforms, making DeFi more accessible to a wider audience. As the demand for DeFi continues to grow we expect more apps to move in this direction, driving innovation and improving the overall user experience of decentralized finance.