"A Deep Dive into Decentralized Exchanges”, Berlin
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We attended this week (January 2018) “A Deep Dive into Decentralized Exchanges”, a meetup about Decentralized Exchanges (DEX), organized by the WEB3 Foundation here in Berlin. Right away: It was not a “deep dive” into the subject, but nevertheless an exciting meetup, with an impressive list of presenting projects. It gave an excellent overview of relevant developments in the space of crypto exchanges and its future. This is the kind of meet-up, which makes Berlin such an outstanding and exciting place for blockchain. We love it!
The projects, which were present, belong without question to the most advanced of the crypto space: Airswap, Gnosis, Kyber Network, Melonport, OmiseGo and Radar Relay. DEX are very important for the blockchain ecosystem in light of the increasing regulation and events like the recent hack of Coincheck in Japan, a centralized crypto exchange. This hack led possibly to the biggest known theft in history. In this case, a combined total of around $723 million worth of NEM and XRP was stolen by the hackers. This is why decentralized exchanges are so important, since they put the trader back into control over their assets, and prepare us for a tokenized economy, where a cinema ticket token will be traded for a silver-backed token, p2p and without middlemen.
After the introductory speech of brilliant Gavin Wood from the Web3 Foundation, many of the projects presented their vision of a tokenized future. You find a summary below.
Radar Relay — is a so-called relayer, built on top of the 0x protocol, has a Ledger hardwallet integration, enabling wallet-to-wallet trades, while providing a user interface similar to centralized exchanges. But what is a relayer? There are three generations of crypto exchanges:
1. CEX — A Centralized Exchange holds your funds (Binance, Bittrex, etc.)
2. DEX — At a Decentralized Exchange, a smart contract holds your funds (Etherdelta, IDEX, etc.)
3. Relayer — The user holds the funds, which are traded directly from a wallet (Radar Relay, Ocean X, etc.)
Alan Curtis, the founder of Radar Relay, expressed his appreciation of 0x as the protocol to power any token exchange with a much-needed governance built on top. Many relayers are currently being built allowing them to pull together their liquidity, and thus avoiding low liquidity like with existing DEXs. The order book is off-chain and decentralized.
Airswap (AST) — a decentralized off-chain p2p exchange was presented by its co-founder Michael Oved. The main goal of Airswap is fairness to avoid front-running, which is very common to other types of exchanges. There is no visible order book. The public has to post a request to get quotes from Airswap. After this, trades are executed in p2p manner and only visible after their on-chain settlement. This can prove beneficial, if someone wants to sell large volumes of crypto (Hello whales and funds) without causing a market panic and price slippage. A similar concept is known as a darkpool with some other projects like Republic Protocol pursuing this idea.
Gnosis (GNO)’s DutchX — this is a decentralized exchange, built on the principal of a so-called Dutch auction. At a Dutch auction, the price starts high and decreases over time until there is a buyer ready to purchase a token. The ICOs of Gnosis and Raiden were conducted that way. In the case of DutchX, the auction goes in cycles of 6–24 hours, in which a trader locks up his tokens and waits for the market collectively to determine within a given timeframe a fair value for the token. This is however not suitable for high frequency traders, who can withdraw their orders or post new ones. The upside being a more fair price-finding as well as the elimination of front-running. The system of 3 tokens was also introduced, the native Gnosis token GNO, then a token generated by staking GNO called OWL and a token called Tulip (TUL), which serves as a reward for trading. Both OWL and Tulip can be used to pay trading fees with a discount.
Kyber Network (KNC)— a DEX, built on a notion called reserve. Half of their ICO proceeds went to create the reserve, a large liquidity pool allowing seamless trades of large quantities of assets. Other participants, like funds and even centralized exchanges, can create own reserves, being able to earn the spread. Kyber is launching on the mainnet in two months.
Kyber is not only a DEX, but also a payment provider for DAPPs and platforms. Kyber customers can pay with any supported token and the DAPP they are using receiving its own native token. For example, they could offer any Augur (REP) user to pay in Melon (MLN), where MLN is being converted into REP by Kyber in the backend. There has been some criticism of application-specific utility tokens, since they limit adoption by providing an entry barrier for a user to purchase a new token. Kyber solves this issue and puts into question the existence of application-specific utility tokens. Don’t get us wrong: we dont question utility tokens in general, but believe that they may possibly move into backend and the average user won’t even know that he or she is using REP tokens when using the Augur platform — Just like today, where few people are aware of the intricacies of the TCP/IP protocol, when they like a cat video on Instagram.
Melonport (MLN)— is a set of tools, enabling anyone to setup a fund on the blockchain and actively manage it, providing the opportunity to the public to invest in it. Melonport also uses 0x to enable the seamless exchange of ERC-20 tokens to its fund managers. At the meetup, It was discussed, how fund management can be democratized with an open source platform. The future of interchain protocol such as Cosmos and Polkadot were also discussed, and how they may impact the fund management landscape. Melonport is developing its own version of cross-chain asset swaps. Together with the law firm MME from Switzerland, Melonport is working on a framework for the fund management in the crypto age, with the ambition to become a standard.
OmiseGO (OMG) and Plasma — David Knott, researcher at Plasma, was addressing in a very emotional and inspiring talk the important topic of scalability. An underlying assumption behind DEX and their seamless operation is that they will also address the issue with scalability. None of the blockchains in their current stage could handle all of the trading on-chain.
Plasma intends to increase the processing speed of the blockchains with so-called child chains. This concept increases Ethereum’s much-coveted transactions per second to potentially infinity, and as David most eloquently put it: “Boom!”
Some concerns over the regulation of DEX have been raised. However, due to the nature of DEX, not holding custody of the customers’ funds, the projects above are legally no crypto exchanges and thus will hopefully enjoy relatively loose regulation. It was very exciting to see how fast, the DEX as so much needed components of the current blockchain ecosystem and scalability solutions are being developed.
At the end, DEX are about freedom — The freedom to trade and transfer value in a p2p way. The sheer scope of the projects being developed and the fact that most of the companies are either in public beta or being launched on the mainnet in few months reinforces the belief and the “bullishness” for the whole blockchain ecosystem. The DEX space and competition is growing very fast, with other projects like Waves, Komodo, Bitshares etc. Centralized exchanges are not going to disappear and Binance recently announcing to build an own DEX in 2018.
Thanks to the teams who presented their exciting projects, the Web3 foundation and the Factory Berlin for the awesome evening, the nice pizza and drinks organized! We enjoyed a lot this great evening, chatting with the representatives of the projects and with friends.