DXdao - Scalibility & Layer 2 strategy

tldr :Dapps will move away from Ethreum mainnet slowly over the next 18 months. DXdao should be open to all scalability solutions, but focus on xDai (now) and Arbitrum (going forward). Each product will have its own strategy as migration away from Ethereum mainnet is a huge opportunity to gain market share.

  • Omen can grow on xDai while preparing for Layer 2
  • Rails could be a place to switch networks, both as a standalone dapp and embedded into others
  • Mesa will continue V2 development and look for a brand-name IDO to launch on a Layer 2
  • Swapr can distinguish itself as a ‘multi-chain AMM’ and have a significant first mover advantage by launching on Arbitrum mainnet
  • A DXdao base will need to live on each chain, but governance will have to think of a single system to scale the core voting process.

Thoughts/suggestions/disagreements appreciated! Outline below, followed by more in-depth thoughts


  • Definitions
  • Current Landscape
  • Infrastructure to consider
  • DXdao’s experience with scalability
  • Overall Thesis on Scalability
  • Individual Product Strategies
  • Governance


Ethereum’s mainnet is becoming prohibitively expensive to use. Gas prices have risen consistently over the last year with large spikes during the DeFi summer and also in the last couple weeks, as ETH price soared, crashed and soared again.

Ethereum is DXdao’s home, so the rising gas prices are an existential threat but also an opportunity for DXdao products to distinguish themselves. The move away from Ethereum mainnet is perhaps the most important trend in DeFi in 2021, but there are still a whole bunch of unknowns. I wanted to build on the conversation we had last week on the product strategy call and kick off a more in-depth discussion on how DXdao should approach scalability in 2021.

First, some definitions:

  • Sidechains - come with their own trust assumptions and do not inherit the security properties of Ethereum. This includes xDai, Liquid (BTC sidechain) and Matic (although their validator count is increasing). You could also consider other L1’s like Polkadot, Near and Solana as ‘sidechains’ because their security model is also independent of Ethereum’s
  • Layer 2 - inherit the underlying security properties of Ethereum. Even when funds are moved onto a Layer 2, they are secure and can be redeemed even if the Layer 2 goes completely dark. You do sacrifice finality (so there is a lengthy withdrawal period) and the Layer 2’s operator can reorder transactions or potentially front-run you. Layer 2 solutions include Loopring, Optimism, Arbitrum, and ZKsync.
  • Bridge - the link between Ethereum and a scalability solution. This is a smart contract on Ethereum that locks the funds and then ‘mints’ a corresponding token/ETH on the sidechain/Layer 2.
  • EVM compatibility - Sidechains/L2’s with EVM compatibility can easily run existing smart contracts with little to no changes.
  • Rollups - a way of batching transactions off-chain and. Here’s a great explainer by Matter Labs of zk-rollups vs optimistic rollups

Current Landscape:

  • xDai is an EVM compatible sidechain that has been live for almost two years. There is a small ecosystem of products there that has grown over the last few months, particularly since the summer, when Gnosis has partnered with xDai as well as some other prominent Ethereum community members.
  • Matic - an EVM compatible sidechain with a healthy number of validators. Polymarket is using it
  • Loopring - a Layer 2 zkRollup that is not EVM compatible. V1 launched in January 2020 and featured a simple orderbook DEX and transfer ability. V2 recently launched and has a fully capable AMM and also a mobile wallet.
  • zkSync - a Layer 2 zkRollup that launched in June 2020 and is not EVM compatible. They are focused pretty exclusively on payments
  • Optimism - a Layer 2 optimistic rollup that is EVM compatible built by the former Plasma team. It is still on test net for everyone but Synthetix is launching on a limited mainnet today(?). Kain’s writeup, “The optimistic Ethereum Transition” is worth a read that goes through some of the challenges of the migration process
  • Arbitrum - another Layer 2 optimistic rollup that is EVM compatible built by Offchain Labs. They launched on testnet in October 2020 and plan a full mainnet launch in March.

Infrastructure to consider

  • Wallets - installing a new wallet introduces a lot of customer friction. Metamask is king here. Most of the scalability solutions have plans to integrate with Metamask.
  • Block explorers - Etherscan is king here. An easy-to-use block explorer is important for an ecosystem to develop
  • Fiat on-ramps or exchange integrations - the next million DeFi users may not interact with the Ethereum base chain at all, and ‘owning ETH’ may no longer be a prerequisite.

DXdao’s experience with scalability solutions

  • xDai - xDai is the only home to a “DXdao base”, where a clone of DXdao was launched in the fall. Mesa (and the Gnosis Protocol) was launched on xDai in November, and most recently (and excitingly), Omen’s launch on xDai is imminent.
  • Loopring - Loopring is a large REP holder that participated in the initial staking period. DXdao launched Rails as a scalable ETH & ERC20 payment solution built on Loopring v1
  • Initial discussions with Matic (Dec 28 DXbiz dev call) and several discussions with Arbitrum, particularly on joining their ecosystem test net launch and their impending March mainnet launch. There have also been some communication with Optimism

Thesis on scalability solutions (imo)

My take (not DXdao’s):

  • No hope on the short-term horizon - There is a lot of money flowing into Layer 2 projects, but nothing is ready for prime time (yet). The cavalry is on its way, but high gas prices will be a ceiling for DeFi (and Ethereum’s) growth for the next 6 months.
  • Layer 2 is the future - security is tantamount for DXdao and if there are to be significant funds - either DXdao’s or in its products - this should be extremely secure. Sidechains show a scalable path forward, but they (imo) are not a long-term solution unless their validator security can rival Ethereum’s basechain. Layer 2’s are only now emerging, but when we think of “Long-term bets”, Layer 2’s should be the focus
  • Liquidity will be fragmented - The pent-up demand and the lack of suitable options means liquidity will slowly flow out of mainnet into the different Layer 2 silos as they go online. While there may eventually be “one winner” in the scaling wars, it’s hard to see that emerging this year. Developers and investors should prepare for a multi-chain world.
  • Blue Ocean and First mover advantage - DeFi on Ethereum is competitive with established protocols with small, but real “moats”. The migration to Layer 2 represents an opportunity to capture market share as assets move around. What’s more, for a product like Swapr, “it’s easier to go wireless if you’ve never been wired”. Meaning, Swapr can build a Layer 2 product or a product across several chains more easily, because it is not held back by the legacy of it’s existing

As such, for DXdao the answer to which scalability solution to use is “all of the above” and to stay nimble as liquidity moves and organic ecosystems emerge. DXdao should be cautious of wasting resources or development time, though. DXdao’s experience in deploying products and governance to multiple chains becomes a strong advantage.

In my view, DXdao should continue to experiment on xDai with Governance and Omen and focus other scaling efforts on Arbitrum for at least the next 3-4 months (and then reevaluate other scaling options).

Individual Products


  • Rails is the only DXdao product already on layer 2, but it has not gained traction and the v1 Loopring rollup that it is built on will soon be deprecated.
  • Going forward: Rails.eth is a great brand name - it captures the Layer 2 essence. Recently, some have suggested that Rails could be a universal bridge to travel to different Layer 2/sidechains. This could be a standalone app AND be embedded into DXdao products. This would require a lot of work.


  • Omen’s gas usage makes the mainnet all but unusable, but the transition to xDai marks a huge opportunity for Omen to grow.
  • Omen requires more coordination and has more dependencies to Layer 1 (Kleros & reality.eth) so moving to another chain is more complicated…
  • What users and what markets to target?
  • Going forward:
    • Omen.eth is well positioned to be the home to prediction markets, regardless of the chain it’s running on.
    • Omen on xDai, launching in has just launched, DXdao should focus on drawing users there by funding markets and also trying to onboard non-crypto people through wallets with credit card support.
    • While Omen Squad focuses on xDai, Omen should prepare to move to a Layer 2. It can benefit from other DXdao product development work on Layer 2.


  • Mesa is in the midst of a revamp, building for a new v2. V1 Mesa already lives on xDai, although it has not gotten much traction.
  • Mesa’s new focus on IDOs could be paired with a Layer 2 strategy. It’s hard to get users to move away from Ethereum’s base chain (“lower gas and faster transactions!” alone does not work), but investors would go through hell or high water to buy a hot token (remember 2017?)
  • Going Forward:
    • Mesa should continue to focus on developing it’s v2 and following DXdao’s product development work on Layer 2.
    • Mesa’s Layer 2 strategy hinges on attracting a brand-name IDO, or some other migration strategy. This is probably the best way to attract liquidity.


  • As a recently launched product competing in a crowded Ethereum mainnet market, Swapr has the most to benefit from the Layer 2 migration, in terms of the competitive reshuffling of the market.
  • There are significant competitive advantages to being the primary AMM on a Layer 2 (blue ocean). Swapr could benefit enormously from a first-mover advantage.
  • Since Swapr can raise LP fees but offer gas savings, it could offer LPs higher returns, while giving traders an overall lower transaction cost.
  • There are plans to launch Swapr on xDai and the Arbitrum test net in the coming weeks.
  • Going Forward:
    • Swapr could distinguish itself for being a ‘Multi-chain AMM’ and own the switching process
    • Swapr should focus heavily on Arbitrum mainnet launch (March) as a way to build liquidity. It could benefit from liquidity flowing to Arbitrum if it is the first Optimistic Rollup to fully launch
    • DXdao should consider using its own liquidity and maybe other incentives to launch Swapr on Arbitrum
    • Need to work on bridge (UI, withdrawals, etc) and also partners for a Swapr L2 launch


Wherever DXdao products go, DXdao needs to go. Already, there is a “DXdao” on xDai. At the moment, this DXdao is simply a clone of the REP holders on Ethereum mainnet. In a multi-chain world, DXdao will need to set up a “base” in order to govern its products there (setting fees on Swapr, curating markets on Omen, etc)

There are two things still to be sorted out:

  1. How do these DXdao bases interact with each other? Is the xDai DXdao base subservient to the DXdao’s home base on Ethereum? Should we ‘anoint’ them to make decisions on behalf of DXdao? Will these bases have different REP holder makeups? And if DXD is introduced into governance, will decisions be decided only by DXD holders on that chain?
  2. How to scale voting for DXdao’s home base? To vote on a single proposal can cost $30-60 right now. What scalability solutions can be used specifically for voting/proposal submission on DXdao’s home base? DAOstack is working on a Snapshot like tool and Augusto is simultaneously working on a DXvote dapp. This is a need now.

Some initial thoughts on how DXdao scalability should proceed. Interested in others’ thoughts, suggestions or disagreements!