Rubicon

Rubicon explained to a five-year-old

We wanted to summarize Rubicon in the simplest terms possible. To do this, we are going to use Reddit’s wildly popular Explain Like I’m Five (ELI5) format to explain some of the core concepts behind Rubicon.

If my audience were the typical crowd of crypto natives, I would say something along the lines of “Rubicon is a decentralized exchange protocol built on Ethereum layer 2 scaling solutions that implements an open order book with native liquidity pools. This design allows Rubicon to facilitate price discovery while maintaining a democratized liquidity landscape”.

Personally, I like that description, but this will not suffice for a five-year-old, so if you read all that and understood it, please understand that this article will look fairly simple to you. Please also understand that less than 1% of the world’s population understands what a decentralized exchange is, so as an industry we need to do a better job simplifying these ideas!

We will begin by saying that Rubicon is a decentralized exchange! Let’s explore both of these words a bit further.

Exchanges are a convenient venue for people to trade things. Typically we think of financial exchanges where people trade assets like stocks, bonds, crypto, and fiat currencies like the US dollar and the Euro. But exchanges can refer to any venue where people go to trade goods; Fort Worth, Texas has a famous cattle exchange where thousands of cows are sold every year. In the past, exchanges were large buildings in regional hubs like NYC, London, Shanghai, etc. where people would go to trade their assets, knowing that other people were there to do the same.

Like many industries, exchanges were disrupted by the internet. All of a sudden regional hubs were much less relevant, and people wanted to trade on the internet. Nowadays, exchanges may still have a building with a trading floor, but almost all of the trading happens on computers. You and I may have traded stocks before, but we did not go to the floor of the New York Stock Exchange! Instead, we clicked a button on our brokerage’s website, and they executed the trade for us.

So with the internet giving people the ability to communicate with everyone on earth, there should be a single convenient exchange where all the trading happens, right? Wrong.

Even with the power of the internet, financial exchanges are scattered across different locations and jurisdictions, leading to fragmented international markets. Instead of harnessing the full power and connectivity of the internet, people tried to bend computer-based exchanges to our human limits.

Now that we have a basic understanding of exchanges, let’s talk about decentralized platforms.

A centralized network is dependent on one central point of control. This can be considered a single point of weakness. If this central point is a computer server, that server can fail and the entire network goes offline.

A decentralized network is distributed across a number of points. We call these points nodes. If one node goes offline, the network stays online. This network is much stronger than one that has a single point of weakness!

Knowing that Rubicon is a decentralized exchange, let’s combine our understanding of exchanges and decentralized platforms.

Typical computer-based exchanges rely on a central server where traders are matched to each other. For the NASDAQ, this is a server room in New Jersey. For crypto exchanges like Binance and Coinbase, these are servers in the cloud. No matter how much time and effort these companies spend scaling this central server, it is guaranteed to crash at some point. If an exchange crashes and people cannot trade, they could lose a lot of money! Exchanges need to not only be convenient venues for trading but also reliable ones.

Instead of building an exchange with its own servers, we built one on a decentralized network of computers. For Rubicon, this network is the Ethereum blockchain, which has thousands of nodes that function together as a world computer. When we upload the Rubicon application onto the world computer, the application gets the strength of the entire Ethereum network. As long as one Ethereum node is online, Rubicon is online.

Rubicon is built on Ethereum, so it supports the trading of any Ethereum-based token. In theory, any asset can be tokenized and have its ownership and value represented on-chain but for now, on-chain assets are mostly limited to an assortment of crypto tokens and stablecoins (tokenized dollars).

Okay, I may be assuming that this five-year-old has a high level of reading comprehension, but we have kept things simple thus far. We covered that Rubicon is a decentralized exchange, but what separates it from others?

We mentioned earlier that Rubicon lives on Ethereum. Ethereum is really busy, and therefore really expensive to use. As far as blockchains go, Ethereum is the most expensive place around! This makes it a rough environment for high throughput financial markets, which is exactly what exchanges need to be!

High transaction costs led some decentralized exchanges to make sacrifices within their designs, forcing them to use inefficient exchange structures, or worse, make them operate their own servers. If an exchange is dependent on one central server, we are back to using a centralized network and the server is guaranteed to fail at some point and disrupt markets.

To escape these high costs, Rubicon is built on layer 2 solutions. Layer 2 (L2) solutions take transactions off of the main Ethereum chain and onto lighter, faster, and cheaper environments. There, they are rolled up together and submitted back to Ethereum as one transaction. This grouping allows thousands of transactions to be grouped together, so fees are much less than if every transaction was submitted individually on the main chain.

On layer 2, applications are much less restricted by costs, so we can start to design a decentralized exchange that is capable of handling high throughput financial markets. The most efficient financial exchanges use open order books to keep track of buy and sell orders, and so does Rubicon! Order books are just a list of the buy and sell orders from all the different traders. In the past, using order books on Ethereum was expensive, but by using layer 2 solutions we dramatically lower their costs.

However, Rubicon goes even further and improves upon traditional order book designs! Typically a small number of companies dominate order books, and there is not much of a chance for normal people to provide liquidity, making money by constantly buying and selling. On Rubicon, we built an open marketplace for liquidity called Rubicon Pools. There, anyone can deposit their assets into a community pool, where experienced traders borrow them and use them to provide liquidity and generate profits. These profits are shared between the traders and the people providing their assets so at the end of the day, everyone within the system is happy because they get a share of the pool earnings!

There is my attempt to explain Rubicon to a five-year-old. I think we kept things simple enough so they could at least understand the basic principles, but if we are being realistic a five-year-old would probably only remember the Bart Simpson meme. Thank you for reading, and I hope you enjoyed the article!