Lattice Exchange: A best in class DeFi project built on Constellation’s Hypergraph
How Lattice will evolve Decentralized Finance (DeFi) with the most scalable blockchain infrastructure, Constellation Hypergraph.
By: Ben Jorgensen and Mathias Goldman
In May 2020, the Constellation Network launched Hypergraph, the world’s largest base layer 1 infrastructure protocol using 45 truly decentralized foundational nodes which laid the foundation to an organized network using concurrent consensus mechanisms. Our team of devoted technologists set out to evolve how businesses used the credible features of blockchain technology and more importantly how consensus was implemented to optimize a decentralized network, and thus introduced a reputation based model built with mathematical proofs and makes hacking infinitely more difficult than traditional consensus strategies and deployments of decentralized networks.
Since 2017, our vision was to be a scalable zero-trust network, a branded decentralized network, that could support real world applications and be the standard for being an interoperable blockchain with existing data storage and data management services as well as other blockchain technologies. We did it and we secured a working contract with various stakeholders in the US Federal Government to use our blockchain technology for a new use case in data assurance!
Over the last six years, the Ethereum network successfully deployed smart contracts on top of a synchronous chain, with a single proof of work consensus mechanism, and have captured new utility in blockchain technology than Bitcoin. Consensys was established as the leading client management services arm to promote and consult Fortune 500 companies on how to incorporate the EVM, Solidity, and use cases around smart contracts pertaining to tracking of digital assets as it moved from A to B to C. In tandem, the cryptocurrency industry created financial use cases, like ICO’s and Decentralized Finance (DeFi), that captured real utility and value in the financial application layer and ecosystem while supply chain management, as a use case, gained adoption from businesses. However, working in solidity has presented a lot of constraints to developers and has prevented meaningful adoption and the value of using blockchain for supply chain management.
As technologists at Constellation, we set out to evolve this narrative and have recently launched our version of Ethereum’s Consensys, called SPORE, that provides not smart contracts, but microservices/state channel support, the thread that is woven between all software applications. Our target market, in contrast to supply chain management with Ethereum and Consensys, is the multi-trillion dollar big data industry with market drivers such as the trillion dollar IOT space, quant trading in traditional securities and finance, the multi-billion dollar data management sector, autonomous vehicles, and artificial intelligence all being accelerated by 5G connectivity and the creation of data in abundance.
Constellation’s goal is to be an ecosystem where not just applications but entire businesses could be built leveraging the value of immutability, auditability, and a tokenized ecosystem. While the work with the US Federal Government has offered validation of our network and the ability to offer speed and scalability for data transportation, we felt a need to showcase an end-to-end framework and business built for the crypto industry. The Lattice Exchange is our effort to tackle not only the cryptocurrency and industry use case, but the traditional finance industry and securities markets.
Lattice Exchange was built out of a thought exercise and research we did as a team as we saw a myriad of applications and projects popping up in the DeFi space. These projects had many features and functionalities that put bandaids on top of a base layer protocol that was inherently flawed and not scalable: gas/transactions fees programmed in the core protocol, synchronous linear architecture, and a single non-concurrent consensus mechanism. We saw an opportunity to re-introduce Constellation through Lattice as the first application built on Constellation. Leveraging Constellation’s core offerings of a faster network, zero transaction fees at the core, and the ability to cryptographically secure more data (complex data structures) and information than a smart contract, created an immense opportunity to create a DeFi solution that would become a aggregation of all DeFi solutions in the cryptocurrency space with a vision to incorporate traditional securities and financial products. This translated into Lattice as an organization that would provide near zero transaction fees, faster reconciliation of trades, cross-chain compatibility, and more complex trade algorithms and mirror the strengths and value proposition of Constellation’s Network.
Constellation is an ecosystem that is meant to bridge real world software systems and data storage with blockchain technology characteristics. The value proposition of Constellation’s Hypergraph and HGTP (communications protocol) far surpassed any other protocol in the space, and one that we could grow Lattice in stride with the developments on Constellation’s engineering roadmap and developer support. In a month, we will be launching our SDK, which will build out a MetaMask like web application for Constellation and will enable developers to access the network.
Additionally, Q4 2020, we will be demonstrating our state channels/micro-service solution for developers that will allow anyone to create customizable data validation and microservices on Constellation. This will let developers plug Constellation into existing data management infrastructures as well as connect to other blockchains. Q1 2021, we will provide open source support on state channels for any developer to incorporate Constellation’s HGTP (Hypergraph transfer protocol) into their applications and tokenize the application (allowing anyone to mint their own token and create token-enabled features based on the minted token in their application). This will let anyone create their own token, like LTX (Lattice), or something akin to an ERC-20, but on DAG and with complex data structures (video, images, multiple databases and data points). A new token standard with speed, security, and scalability at its core.
Constellation was built with technical, financial, and economic scalability in mind. Constellation’s feeless (or fee optional) protocol provides a financial incentive for people to build applications at a low cost to consumers and partners that use the network. Lattice Exchange leverages this to everyone’s advantage. In most of the DeFi space, traders incur three fees: deposits , trade settlements, and withdrawals from pools. Because Constellation’s Hypergraph is feeless, the value proposition (and user acquisition strategy) will be to use trade volume as an incentive to wave trading fees. This will also allow traders to create predictive revenue models and thus more scalable businesses and utilization of DeFI. Thus, Lattice is not only faster but cheaper and easier to use. Lattice will establish a framework for building on the Constellation ecosystem for a myriad of use cases and applications that require speed, security, and scalability.
Our roadmap for Lattice is broken into the following phases:
- Phase 1 (MVP): Aggregating Liquidity Pools, Multiple AMMs, and creating a user friendly interface like Uniswap. Our focus will be to provide settlements on Ethereum and capture volume on the Ethereum Network. During this phase we will also deploy multiple AMM’s that are specific to select coins.
- Phase 2 Q1 and Q2 2021: Cross Chain Compatibility and Settlements on Constellation’s Hypergraph. Here we will introduce settlements on Constellation’s network and provide cross-chain compatibility between ETH and DAG. Individuals will be able to conduct trade settlements (fees based on volume and will be minimal), and the ability to stake DAG.
- Phase 3 Q3 and Q4 2021: Oracalizing Trades and introduce more complex AMM’s validated by the Constellation network. Existing oraclization solutions in crypto are not meant for complex trading algorithms (smart contracts can’t support more than simple numeric values). Constellation’s network was built to support complex data structures paving the way to validate and accommodate trade solutions often seen in traditional securities strategies.
Core Features and Functions
One of the most important aspects in DeFi are liquidity pools. We are still in the process of structuring our liquidity pools and how the governance of the liquidity pools will function. Our goal is to provide multiple AMM’s optimized for specific token types like regular ERC-20 and stablecoins. There are a lot of well known approaches to AMM, but they are rather simple as settlement needs to occur on Ethereum (and the EVM can only handle simple algorithmic functions). Our goal is to build a plethora of AMM’s and eventually host more complex AMM’s on Constellation’s Hypergraph (after all, Constellation is being built to support complex data structures) and oracalize data on Constellation (using our state channel/microservice framework) creating more robust trading solutions in the near future.
For More Information on our Phase 1 AMM approach, please refer to our white paper.
Aggregating liquidity pools is just one of the features we’re highlighting in our 2020 MVP. Even with the CHI token, 1inch Exchange is subjected to Ethereum gas fees. Once we get to Phase 2 on Lattice’s roadmap, we will push settlements onto Constellation’s ZERO transaction fee network. Participating in the v1.0 DeFi space means being subject to three primary fee structures: deposits, trade settlements , and withdrawals from a liquidity pool. By reducing the transaction fees to ZERO, we aim to successfully attract users. In Phase 2, we are going to create a user friendly experience (much like Uniswap) while providing a novel and advanced deposit withdrawal solution that will be governed by the LTX token (potentially providing key pairs to the end user while tapping the governance to settle a transaction). This not only will keep users in custody of their funds but also encompass a cross-chain double spend protection as well as cutting down more on the ERC-20 ecosystem based fees — making this a first in the industry in fee savings.
One of the major potential issues is the underlying infrastructure that 1inch is built on — Ethereum. In a Black Swan event, like we saw in February, capital seeks rescue in the form of fiat. All markets across the board are rapidly drawn down. For example, if BTC falls to $6k USD or the stock market craters bc of another global lockdown, liquidity locked in DeFi will get moved from farming contracts to a CEX (centralized exchange) or a swapping contract.
This requires multiple transactions per user, quickly overloading the Ethereum network because everybody wants to get their money out. In turn, this will cause people to front run transactions in the multiple thousands of USD — like they did with CryptoKitties in 2017. Users were willing to pay thousands of dollars to front run a single transaction. Now, DeFi is a much more complex ecosystem with a multiple tx volume per user (users are on multiple platforms and contracts at the same time) than CryptoKitties. ETH node operators are incentivized to frontrun the txs in their mempool, creating a fundamentally unfair and risky ecosystem with billions of USD at stake — we believe such vast sums of money should not be at risk due to a non-scalable and expensive infrastructure.
That means some wealthy holders will be able to get their liquidity out and sell for a stablecoin or USD. This means increased sell pressure on ETH and the other farmed currencies. This in turn drives prices down even more. But all the smaller holders won’t be able to get their allocations out of their wallet to a CEX or swapping contract; it’s just not worth it and they cannot afford it when a tx costs thousands of dollars. In the event of a black swan event or a major pullback in the markets, a huge amount of capital will be stuck due to the restrictions of scalability of the underlying network infrastructure — Ethereum.
Lattice’s competitive advantage is Constellation’s Hypergraph Network, built for speed and with zero transaction fees.
Another of Lattice’s key strengths is cross-chain interoperability. Access and liquidity between ERC-20 and DAG will drive massive adoption to the DAG ecosystem and open the DeFi ecosystem to a more versatile infrastructure. In the later buildout stage Lattice will not only encompass ERC-20 to DAG cross-chain pools and swaps but also to other native chains and ecosystems.
Governance and the Ecosystem
We are still forming our conclusions on the LTX governance token. The governance token will serve to implement policies in the Lattice Exchange. One role that the governance token will play is deciding on LTX settlement fees (if applicable) as well as farming reward structures. An exciting approach we are exploring grants users access and custody to their private keys while interacting with Lattice. In Ethereum, smart contracts have permissions built into them, therefore, participants have complete control and can effortlessly make continuous trades. The governance of LTX would have to approve trades/settlements. The governance token will not only play a role in liquidity farming (and if governance decides on trading fees) but also deposit/withdrawal mechanism.
LTX is an important asset that determines most parameters of value generation in the Lattice ecosystem, similar to YFI, UNI, SUSHI and others. With increased liquidity and fewer fees, the value proposition to own LTX is quite high. A strong base of advisors and institutional investors will make sure that not only liquidity pools are available but are gaining growth momentum.
LTX is paid out as pool rewards (farming) enabling DAG holders to participate in the governance and business model of Lattice — thus rewarding DAG holders as well as LTX holders without diluting the DAG ecosystem with DAG airdrops. Think about the projects that will be built on the Hypergraph driving further value with complete cross-chain liquid tokens (not only in our DAG ecosystem and token standard but also to ERC20). That’s a very powerful value proposition from multiple angles. Lattice will allow developers to use data to underwrite more complex trading AMM’s and capture some of the $30 trillion traditional securities markets. Traditional securities and advanced quant hedge funds leverage data to underwrite trading algorithms. Constellation will support a decentralized data exchange paving the way for the evolution of trading solutions on Lattice.
Summary
There is a reason that no centralized applications have fully integrated blockchain technology, and thus Constellation’s HGTP becomes the gateway between web 2.0 and web 3.0 data processing: the infrastructure tools to integrate and scale with centralized data management and applications haven’t existed and are not robust. Our goal is that every application will secure their data pipelines by adding Constellation’s HGTP (hypergraph transfer protocol) to the core of any build. Lattice is a blueprint and an end-to-end framework on how to build an application and business on Constellation.
Lattice is not just an evolution of the DeFi industry but is a new standard in decentralized finance that will introduce scalable business and predictable business models into the financial sector. The Constellation ecosystem will also serve as the default blockchain protocol that provides economic and technological scalability for a new wave of applications and use cases that blend existing digital infrastructures with the features of immutable decentralized infrastructures.
