Welcome to the first lesson of Module 4, where we delve into the intricate mechanics of the Injective Protocol. Our focus in this lesson is on the Layer-2 Decentralized Exchange Infrastructure, a key component that powers the Injective Protocol. The Layer-2 Decentralized Exchange Infrastructure is an innovative solution that addresses some of the most pressing issues in the blockchain space, such as scalability, speed, and cost.
What is Layer-2 Decentralized Exchange Infrastructure?
Layer-2 refers to a secondary framework or protocol that is built on top of an existing blockchain network. In the case of Injective Protocol, this Layer-2 framework is built on top of the Ethereum network. The primary purpose of this Layer-2 infrastructure is to take some of the computational load off the base layer (Ethereum), thereby increasing transaction speed and reducing associated costs.
Decentralized Exchange (DEX) Infrastructure, on the other hand, refers to the underlying technology that powers a decentralized exchange. This infrastructure allows for peer-to-peer trading without the need for an intermediary, such as a traditional exchange.
Injective Chain
The Injective Chain is a layer-2 sidechain and Cosmos Zone connected to Ethereum. It leverages verifiable delay functions (VDFs) to enforce a fair transaction ordering consensus that reflects real-world time via proof-of-elapsed-time. This solves critical race conditions and miner extractable value issues present on Ethereum.
Currently, Injective Chain powers the layer-2 derivatives platform, serves as a decentralized Trade Execution Coordinator (TEC), and hosts a decentralized open orderbook. The chain itself is built on top of Tendermint and allows for the transferring and trading of Ethereum-based assets on the Injective Chain. Injective will be integrated with Cosmos IBC, bringing advanced inter-chain decentralized finance capabilities to users.
Injective Exchange
Unlike traditional exchanges which serve as gatekeepers to the crypto industry, Injective transforms an exchange into a decentralized public utility. What truly differentiates Injective is that it brings every component of a decentralized exchange to the public. Everything — from
the front-end exchange interface, back-end infrastructure, smart contracts, to orderbook liquidity — is provided openly and for free. This transforms the traditional business model of exchanges as the technical barrier to entry for individuals is eliminated, allowing them to freely
run a highly performative exchange.
Injective’s model rewards relayers in the Injective network for sourcing liquidity. By doing so, exchange providers are incentivized to better serve users as they competing amongst each other to provide better user experiences. Thus, this allows users from all around the world to
access DeFi marketplaces.
How Does it Work?
The Layer-2 DEX Infrastructure of Injective Protocol works in tandem with the Ethereum network. When a transaction is initiated on the Injective Protocol, it is first processed on the Layer-2 infrastructure. This processing includes the validation of the transaction and ensuring
that it complies with the protocol’s rules. Instead of directly submitting this transaction to the Ethereum mainnet, the Injective Protocol utilizes a Layer-2 solution. Layer-2 solutions are offchain protocols or networks that operate alongside the main Ethereum blockchain. They are
designed to handle a large number of transactions off-chain, thereby alleviating the congestion and scalability issues often seen on the mainnet.
Once the individual transaction is validated, it’s grouped with other transactions that were also processed on the Layer-2 infrastructure during the same period. Batching involves combining
multiple transactions into a single unit. This step is crucial for reducing the number of individual transactions that need to be recorded on the main Ethereum blockchain. The batches of transactions are then added to the Ethereum network as a single aggregated transaction. This
aggregated transaction is what is recorded on the Ethereum mainnet. Because multiple transactions are combined into a single one, it significantly reduces the load on the Ethereum network. This reduction in load leads to faster transaction speeds and lower gas fees, as the
gas fee is now distributed across multiple transactions within the batch.
Why is it Important?
The Layer-2 DEX Infrastructure is a crucial component of the Injective Protocol for several
reasons:
1. Scalability: By processing transactions off-chain (on the Layer-2 infrastructure) before adding them to the Ethereum network, the Injective Protocol can handle a significantly larger number of transactions compared to traditional blockchain networks.
2. Speed: The process of batching transactions together leads to faster transaction speeds, as multiple transactions can be processed simultaneously.
3. Cost: The use of Layer-2 infrastructure reduces the load on the Ethereum network, which leads to lower gas fees for transactions.
4. Reduced Network Load: Batching reduces the number of individual transactions processed on the Ethereum network, leading to improved network efficiency.
In the next lesson, we will discuss another integral part of the Injective Protocol’s mechanics – the use of Ethereum as a base layer. Stay tuned!
Remember to review this lesson and make sure you fully understand the concept of Layer-2 Decentralized Exchange Infrastructure before moving on. Happy learning!