Martin Saps

Decentralised Exchanges: What’s the Point? Part Two: Making the most of collaboration in an open-source environment

April 26, 2018


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Filling in the gaps

To create a stronger bridge between the token economy, and the rest of the global economy, it will be important that the frictions listed in the previous section are addressed. This might be done through the introduction of new infrastructure, better targeting of resources, or even through a hybridisation of centralised and decentralised innovations. We discuss these solutions below.

Solution 1(a): Bridging decentralised security to centralised liquidity

One idea gaining traction is to combine the best of decentralised security benefits, and centralised liquidity benefits. Decentralised exchanges store funds across many smart contracts which keeps those funds safe. Those smart contracts only come on-chain to process an order, lowering the opportunity window for theft. These decentralised exchanges match buyers and sellers on the internal network, but when an order cannot be internally filled, the order is re-routed and filled on an external exchange offering the lowest fee. This brings centralised liquidity pools into the loop, which decentralised exchanges can leverage until they accrue enough of a user-base to provide liquidity independently. What’s better is that this mechanism would only out-date once centralised exchanges have insufficient liquidity (i.e. all of the money is now on decentralised exchanges). The ‘hybrid exchange’ concept is now being tested out. The creators of Bitfinex, for example, recently launched Ethfinex. Ethfinex allow users to store funds on smart contracts, which can be liquidised on the centralised Bitfinex exchange. Ethfinex currently handle a 24h trading volume of $11 million and have just posted on their first successful month of trading. It is important for us to note however, that liquidity in this model is restricted to what is available from Bitfinex, who are having a notably difficult time meeting demand for liquidity. Out of 2.6EUR billion, 2.5EUR billion are deployed, the list goes on (see table below). By opening an oracle on the exchange to all available exchanges, a decentralised exchange will have more access to liquidity. Similarly, Omega One are playing with the concept, but have yet to enter the market.

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Table.2. Shows that most active margin funding on the Bitfinex platform is already being leveraged

Solution 1(b): DLT-based transfers systems

So far, there have been two initiatives within the token economy which seek to address this problem, and could be applied to decentralised exchanges. The first is to have fiat liquidity channels on your exchange. Kraken has used SWIFT to offer this service on their exchange, opening JPY, EUR, USD, GBP and CAD liquidity. StellarTerm are a decentralised exchange which utilise this service to enable EUR and USD transactions of XMR-related purchases. The issue here however, is that users of this service must still deal with expensive exchange rates. The second solution is to integrate distributed-ledger technology into international transfer systems. This would enable same-day fiat transfers, which would be important when dealing with crypto (which is international by nature). The alternative is the week-long SWIFT transfers which require you to wait longer, and pay heavy exchange fees. This mechanism is still being researched, but we have already seen companies like Ripple (xCurrent & xRapid) and Santander (Santander One Pay FX) testing the concept. Santander can already process same-day international transfers using the technology. The incorporation of this service into liquidity channels such as those offered by StellarTerm would massively reduce fees and increase reliability.

Solution 1(c ): Reducing Slippage through the introduction of crypto dark pools

Structural barriers for institutional investors are not new, so there have long been ways to deal with them. One way has been through the use of dark pools. Dark pools allow whales to trade huge sums without stating their identity or intention, effectively hiding the order book. Already being tested in the markets since the 1980s, dark pools have resulted in significant reductions in (price) slippage. This feature has existed for a few years on token exchanges like Kraken, but alone has not been sufficient for large investors. This could be due to previously lacking regulation, and poor security in the token economy. Both of those things are quickly changing. Republic Protocol is currently testing out the idea of decentralised dark pools in crypto.

Solution 2: ‘Anonymous’ custodianship

What about accountability? Aren’t innovations like decentralised exchanges and dark pools fundamentally in violation of the AML/KYC laws which are being stamped across the token economy by regulators worldwide? When investing large sums of other people’s money, how can institutional investors remain insured from scams and theft? Don’t both of these insurances run contradictory to the concept of being anonymous? Innovators focused on digital identity are quickly formulating solutions which could address this issue. Namely, the use of DLT-based zero-proof identification. Decentralised identity protocols like Sovrin, Self-Key, and Civic allow users to prove their credibility without giving away any personal information. Initially, this concept may not bode well with your senses, but Sovrin’s whitepaper summary of ‘minimal disclosure’ puts this into context:

“Suppose you had a digital copy of your driver’s license in the form of a verifiable claim. You could then use a mobile app to present a zero-knowledge proof that you are old enough to drink. The bartender could verify the proof using the public key of the issuer (similar to verifying a digital signature). But the bartender never learns (i.e., has “zero knowledge of”) your actual birth date.”

In doing this, users are able to prove key features about their credibility (such as credit rating, citizenship, etc) needed for regulatory and insurance-based procedures. They can do this without violating key principles of decentralisation or anonymity.

Solution 3: Bringing UX to the forefront of discussion

For UI/UX, the solution is straight-forward. Dedicate more time and resources! For many teams outside of the token space, there are entire teams focused on user-experience. David Atchley does a great job putting the importance of UI/UX into perspective:

“Designers are playing an important part in how blockchain technology wins or loses in that future. Designing for any product should focus on the user and their goals. Never the underlying technology. Designing for any technology will always pull the focus for designers towards the pernicious and sub-optimal parts of that technology in order build great experiences on top of them. Don’t lose focus of how your product is making your user successful. And don’t let the technology become the ends, rather than the means.”


By simply considering what competitors are offering, what users want, and leveraging open-source infrastructure to incorporate these features into a single body, they suddenly become a lot more appealing. This is the power of interoperability. Decentralised exchanges were a fun way to test this out, and were appropriate given their foundations on principles such as decentralisation and being open-source. In doing so, we were able to outline some of the key pain points preventing greater adoption. Namely, we found that a lack of development in infrastructure, UX/UI, and a lack of custodianship made decentralised exchanges less credible. We also found ways these problems might be addressed. Namely, we found ways to bridge crypto liquidity pools between centralised and decentralised exchanges, and fiat liquidity through payment channels like SWIFT, or even better, DLT-based channels which speed up the process. We also outlined ways in which custodianship issues could be addressed, and laid out some principles for UX/UI development. Although we focused on decentralised exchanges, this concept can and should really be applied to any industry. The Convergence Ecosystem sees interoperability protocols and decentralised marketplaces as core data infrastructure required for seamless, automated data and value exchange. But in the meantime we have to deal with the world as it is; the winners will find ways to build the bridge from the old world to the new. We want to partner with teams doing just that.


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