Why ICONPOOL could be a gamechanger for the ICON ecosystem
Earlier this week, Blockdevs — a group of blockchain developers who operate as a decentralized organization — announced they were working on a project called “ICONPOOL”, which they described as “an automated market maker and liquidity provider for all things ICX.”
To the unitiated, it may not be entirely clear what this means or why it’s important. But as I will explain, this project is critically helpful in the long-term growth of the ICON ecosystem.
First, a quick overview of just what ICONPOOL is. The most comparable project is Uniswap, which many in the cryptocurrency community are familiar with, but still flies a bit under the radar within the community as a whole.
Here’s a brief but helpful definition from this introductory article to Uniswap:
Uniswap is a decentralised exchange in the form of two smart contracts hosted on the Ethereum blockchain, as well as a public, open source front-end client. It’s a 100% on-chain market maker allowing the swapping of ERC20 tokens, as well as ETH to an ERC20, and vice-versa.
It’s fairly simple to use. You simply connect your wallet to the Uniswap contract, select the trading pair you’d like to trade, and set how many you wish to buy, a lot like a standard exchange. However, rather than buying from other traders offering their tokens for sale, you’re instead pulling them from the liquidity pools that have been filled by other users (who provide liquidity in exchange for a portion of the trading fees), which then determines the new price based on the change in liquidity for each trading pair.
The benefit is that it’s far easier to purchase tokens that may not have much liquidity in other exchanges, because there aren’t any order books; instead, you’re essentially just adjusting a pricing formula to reflect the new balance in the pool. And, as occurs with exchanges, bots and aggressive traders exist to iron out any arbitrage that might occur if an exchange rate on Uniswap differs greatly from the price found on other exchanges.
The other benefit is the decentralized nature of Uniswap. The funds go directly into your wallet, and aren’t held by a 3rd party exchange (who can lock or lose your funds). While this does pose some risk — you are depositing into a smart contract that could have vulnerabilities — Uniswap has yet to see any sort of security breach.
For a more complete understanding, I recommend reading the introductory article I initially linked to above.
Along comes ICONPOOL
I had a chance to speak with Aaron of Blockdevs about the initial thought process behind ICONPOOL.
“The inspiration of the project came from numerous discussions and brainstorming sessions between our team and also with Piconbello,” he said. (He also credited Emre of Piconbello for the name “ICONPOOL”.)
“While discovering and digging into the DApp ecosystem of ICX (while assisting Piconbello’s project developments), we realized that even though the tech is great, ICX is still lacking the core DApps that enables network effects and mass user adoption, which in public blockchain’s case often fall into category of gambling, DeFi and gaming to name a few. DeFi being the most exciting use case of public blockchain DApps for our team. So when looking deeply at what actually could trigger the network effects of users and developer onboarding, we came up with the idea to implement an Automated Market Maker(AMM) to enable more token economy into the system,” he continued.
Similarly to Uniswap, ICONPOOL will offer benefits both to the traders who utilize it, and the liquidity providers who support it.
Traders will benefit by being able to purchase other tokens built on ICON — such as TAP, WOK, SPORTS, or others. That means ICONists can purchase a larger amount of TAP without having to be as concerned with buying up an entire orderbook and causing the price to skyrocket.
Meanwhile, those who are offering liquidity into the pool will receive a share of the transaction fee from the trade (currently 0.3% per trade). Each user’s share is determined by the proportion of liquidity being provided in the pool.
Additional benefit is provided to those who are developing DApps. Adding a token to the ICONPOOL protocol is quick and fairly easy, meaning that a DApp provider can essentially gain immediate liquidity for their token, without having to worry about having to waiting months (or even years) for an exchange listing.
In terms of how this will play out, Aaron said “we are planning to make all IRC2 and other suitable standard tokens available on ICONPOOL, but we will take a ladder approach of listing and growing the pool token pairs one by one. Also we are implementing smart routing right now to support multiple pairs for instant swaps even on a limited number of pools.”
And, for all ICX holders, there’s a benefit as well. Each trade will require a transaction fee, paid in ICX, as the natural outcome of performing a transaction on the public chain.
ICONPOOL’s role in the ICON ecosystem
So obviously ICONPOOL provides benefits just on it’s own, but ICONPOOL’s presence potentially provides a benefit to the ICON ecosystem as a whole that may surpass the sum of it’s parts.
As Aaron pointed out to me, “DeFi is also famously known as money legos, where different protocols work in conjunction to create powerful financial instruments on the blockchain.”
With the recent discussions of bringing more exchanges to the ecosystem, we want to bring a solution that will provide the liquidity of ICX as well as the possibility to stake at the same time without compromising the security of the network, this way we can balance the advantages of staking on exchanges and prevent too much power being transferred to them. We have decided to implement an IRC2 token called Liquid ICX (LICX) that will be the base of our DeFi solutions on the ICON network.
Here’s a more specific description:
1 LICX (Liquid ICX) represents 1 staked ICX. LICX can be transferred to other wallets. Moving LICX to another wallet essentially means moving the staked ICX. The rewards distributed by the network get automatically restaked. A wallet that contains LICX automatically gets rewards in the form of LICX.
I’ll likely be digging into LICX a bit more in the future, but for now, it’s important to recognize how it benefits ICONPOOL and the ecosystem as a whole. For that, I’ll let Aaron explain:
We have been observing LICX closely for a while. The problem we see with the ICX dapp ecosystem currently is that users come to ICX for the staking rewards and don’t actively participate in the ecosystem with DApps etc due to the majority of ICX being locked. ICONPOOL would have faced the same issue because the whole product and the whole ICX DeFi requires a lot of activity on chain to kick off network effects and high interest from users and developers.
This is an important observation. While the staking rewards do a great job of enticing the purchase of ICX and active governance, the locked nature of the tokens does make it more difficult to actively participate in other elements of the community. LICX would remove that barrier.
Accordingly, ICONists could exchange their ICX for LICX, continue receiving rewards, and provide liquidity to ICONPOOL in order to also capture the transaction fees from trades. This benefits both the user — since they’re gaining even more ICX — and ICONPOOL, since it has greater liquidity.
What’s the big picture?
Ultimately, it’s important to view the ICON ecosystem as a growing organism; while the key feature of ICON from the start has been interoperability, it’s also clear that the team behind ICON (including the community as a whole), is aware that the platform can be and provide so much more. It can effectively be its own economy, with a number of various services and utilities, all of which add additional value to the holding the ICX token.
Just as the ICON interopability technology offers the technical ability for various blockchains to interact with one another, ICONPOOL could effectively allow the various DApps and tokens within ICON to operate with one another. As of right now, it’s very hard to determine the inherent monetary value of a token on the ICON ecosystem, because most lack a liquid exchange; those who wish to trade have to either trust the person they are trading with, or utilize an ad hoc third party. While these solutions can be workable, they aren’t ideal.
By providing liquidity with ICONPOOL, the Blockdevs team is helping to lay the groundwork for a much more active and vibrant ICON economy over the long-term.
Just like the availability of Uniswap helped kick off a DeFi frenzy on the Ethereum network, it could potentially do the same for ICON (although we could probably do without the Yams).