It Is Time For Integrated IBC Operators

Polkachu Intern | 2023-07-07

IBC is a great technology. It is one of the few bridging technologies that are generalizable, scalable, censorship-resistant and most importantly, unhackable (knock on wood 🙏).

IBC's Fragmented Supply Chain

IBC does not come with a native monetization model. Because of this, its supply chain is fragmented. While IBC as a whole is not monetizable, each individual component can be attached to an existing business model.

• IBC relay software is maintained by Informal and Strangelove.
• Channel creation and maintenance are typically coordinated by chain projects
• Analytical dashboards are maintained by Mintscan, MapOfZones, and SmartStake.
• Packet relaying is typically done by validators who fund the operation from validator commission. Validators often get a foundation delegation to compensate for their work.
• Information about channels, clients and ports are maintained by a decentralized group of developers on a GitHub repo called Chain Registry
• Users interact with IBC with various UIs such as Osmosis, TFM, Keplr Wallet, etc.

IBC and Integration

"During the early stages of an industry, when the functionality and reliability of a product isn’t yet adequate to meet customer’s needs, a proprietary solution is almost always the right solution" - Clay Christensen

Many IBC maxis like to say that the fragmented / decentralized nature of IBC's supply chain is not a bug but a feature. I agree only to certain extent. The current fragmentation has caused many user pain points. For example, end users do not know who to contact when a packet is stuck; many relayers do not know how to fix an expired channel; projects need to reinvent the wheel to set up and maintain IBC channels even if such tasks have been done by many projects before. It is a miracle that IBC works at all despite the utter chaos behind the scene.

We are in the early stages of an IBC-connected world. It would be nice if one or several centralized operators can be the "manager" of IBC that we can all rely upon. This does not change the permissionless nature of IBC relaying, as each component of the stack is still permissionless for anyone to enter and exit.

"Show Me The Money!"

The biggest barrier to an integrated IBC player is not the abstract philosophical objection, but how such operator can monetize for their operations. An integrated IBC player needs to:

• Have a staff to create, maintain and document all canonical channels
• Have a customer support team to handle end-user issues
• Have an engineer team to maintain analytical dashboards
• Run full nodes for each chain (can be contracted out)
• Spend tokens to run all IBC channels (can be contracted out with fee grant)

At this point, you might want to propose an Interchain non-profit collective with grant proposals and all that shit. To this, I say please chat with Principal Milton Friedman while I take the rest of the class on a fun capitalist trip.

There are 4 existing Interchain entities that can potentially integrate all components of IBC operations. It is not clear how it pays off, but hey, we are talking about venture bets there, so bear with me.

1. Validators: Validators are already running nodes and doing most of IBC relaying. They have a crypto-native way of monetization through staking commission. Some enterprising validators can potentially expand their Interchain influence by becoming an integrated IBC operator. The bet is that the additional staking revenue from enhanced brand exposure can cover the cost.
2. DEXs: DEXs like Osmosis are the main reason why users want to IBC a token in the first place. If Osmosis starts to support IBC even if end users do not use its DEX, its IBC operation can potentially become how it acquires new customers. The bet is that the additional trading revenue can cover the cost, not to mention the strategic benefit of dominating the DEX mindshare.
3. Stablecoin Issuers: Stablecoin issuers like Noble is the main beneficiary of IBC-assisted Interchain commerce. The more thriving the IBC economy is, the more stablecoins will be minted and more net-interest revenue will be generated (side note: Tether generates more profits than BlackRock in Q1 2023). It is Noble's best interest to "altruistically" fund an integrated IBC operation. The bet is that the additional net-interest revenue can cover the cost.
4. Chain-Agnostic Projects: This is the wild card. In the interchain, we have many chain-agnostic projects such as Polymer, Skip, Cosmology, etc. They are funded by VC money, but their monetization strategies are far from clear, especially because they do not have a token. It is reasonable to expect that some might explore the IBC rabbit hole. After all, an integrated IBC player is an "aggregator" in Ben Thompson's sense. Once you control user demand, it is sticky to switch away. They can figure out monetization later. The bet is that IBC will generate so much value in the Interchain that an aggregator can capture some.

Pirates and The Navy

If you spend any amount of time in a chain's IBC relaying Discord channel, you will be amazed that IBC relaying works at all. It is almost like observing pirates winning a maritime war. It shows the power of decentralized technology, but we can do better. After all, all pirates need to become the navy, or face the cruel cold sea.

The Cosmos ecosystem has lots of tailwind behind its back in 2023. Both USDT and USDC are coming; dYdX chain will launch in the coming quarters; CosmosHub finally finds a product that other chains want in ICS; Babylon is bringing Bitcoin security; Injective and Sei are stretching the limit of how fast a Tendermint chain can be; Kujira is going against app-chain conventional wisdom and charting its own path; some validators are inventing business models just by sheer shitposting; and BadKids oh my...

With all this, you tell me that we just keep the status quo in IBC operations? It is time to build a navy around IBC. It is time for integrated IBC operators.