With so many cryptocurrency projects creating decentralized exchanges (DEXs) of their own, it’s reasonable to be skeptical about yet another. Today, cryptocurrency project Decred released an official proposal for its own Decentralized Exchange (DEX). Decred founder Jacob Yocom-Piatt says frustrations with the listing process on large, centralized exchanges initially sparked his plan, but the Decred community will ultimately decide if a DEX is the right next step. While Decred may offer an alternative, will they be able to draw the liquidity missing from existing DEXs and meet regulatory concerns?
The Decred proposal outlines, “a new type of cryptocurrency-only decentralized exchange based on open source software that will allow cross-chain trading to occur directly between users, with minimal fees and a simple client-server architecture.”
Background On Decred
Decred is a cryptocurrency project born out of disagreement within the bitcoin developer community. The project has a total supply of 21 million coins, with an 8% premine to cover some development costs and share through an airdrop. For more information on Decred, take a look at this piece I wrote on Decred Governance earlier this year. Cryptocurrency, DCR, usually falls somewhere in the 30s by market cap and was listed on Poloniex in 2016 and Binance in 2018.
The Decred DEX proposal will be voted on in Decred’s off-chain voting platform Politeia where it will need to be discussed and passed by community members before any development takes place.
Another Day, Another DEX?
Yocom-Piatt says the Decred DEX will be a departure from the profit-seeking models followed by centralized exchanges and DEXs today. “Centralized exchanges make huge profits on listing fees and trading fees. Some of the big ones request ridiculous 6-, 7-, or even 8-figure listing fees. Most DEXs are also based on a profit-seeking model that doesn’t always equal fair play for retail traders.” says Yocom-Piatt.
Most cryptocurrency exchanges run on either an underlying token or blockchain to make a profit on trades. Some also offer discounted trading fees to traders who buy and use their own exchange token for lower trading fees. Binance, for example, offers a 25% trading discount when traders use its native exchange token, BNB. DEXs, like IDEX, 0x and BarterDEX pair traders through atomic swaps where traders pay a percentage fee on each trade. Decred’s DEX isn’t charging trading fees, but traders still have to pay a fee to each server they use to make trades.
Yocom-Piatt says this new DEX is focused on fairness for all traders,
“By doing pseudorandom order matching in epochs — say every 10-60 seconds — it puts everyone on a much more level playing field with respect to latency. The person using satellite internet in Siberia can’t be taken advantage of by traders with a fiber link at the nearest interchange point, allowing buyers and sellers to transact without the opportunity for day traders to front-run their orders.”
Regulation Still Applies
A bigger potential issue stems around US regulations surrounding cryptocurrency exchanges, especially as the SEC is carrying out more regulatory action around cryptocurrency. Speaking to the regulatory concerns all decentralized exchanges should consider, Jake Chervinsky, a lawyer specializing in crypto-regulation at Kobre & Kim LLP says,
“Despite the difference in the underlying technology, decentralized exchanges are likely to face all the same regulatory challenges as centralized exchanges. Last November, the SEC sent the message through EtherDelta that decentralized exchanges are subject to all the requirements imposed by the federal securities laws, including registration as a “national securities exchange” under the Securities Exchange Act of 1934. At the time, the chief of the SEC’s cyber unit, Robert Cohen, explained “[t]he focus is not on the label you put on something or the technology you’re using. The focus is on the function, and what the platform is doing.” The CFTC will likely take the same view for exchanges required to register under the Commodity Exchange Act.”
What’s Different From Other DEXs and Exchanges:
- Decentralized decision-making Ultimately, whether or not this DEX happens, is up to participants in Decred’s off-chain voting system.
- A very simplistic matching method (client-server model) Most DEXs use their own token or special blockchain to execute trades, but this is somewhat similar to AirSwap’s model, minus the underlying token.
- Only cryptocurrencies are traded, no fiat currencies(meaning you have to make the cash to crypto conversion elsewhere, get paid for work via Bitwage, or some other creative solution that will probably require full identity verification to meet KYC laws.
- No trading fees for matching orders, you will have to pay an initiation fee to each server you want to trade through.
- Standardized buy/sell order sizes to make it easier to match traders.
- Support for any trading pair by market demand. Listing new coins is as simple as users offering up a new trading pair “I want to sell YouNameItCoin for BTC and someone else agreeing to make the swap”.
- The trader sends first. Centralized exchanges solve this question by having both parties send funds to them first, but sometimes it’s unclear who sends funds first on DEXs. On Decred’s client-server model, if you put in a market or limit order with a server, as the client, you would send funds first.
- A trading reputation system. If the client decides to stop the trade at any point in the atomic swap process, proof of their misbehavior is published publicly for other clients and servers can see. Servers can also ban “bad actors” from trading “after a certain threshold”.
What’s Similar To Existing DEXs:
- Traders always have custody of their funds. Traders don’t have to worry about custody problems or commingled funds because swaps occur between buyers and sellers and never the exchange.
- Atomic swaps through basic smart contracts. Several other DEXs work similarly
to match buyers and sellers without a middleman by using atomic swaps.
An atomic swap works by two parties agreeing to trade their funds. The Decred DEX proposes once a trade is complete, the trade gets broadcasted on the servers, making a record of the transaction.
Comparing To Komodo BarterDEX
I spoke with Komodo CTO, Kadan Stadelmann on the differences between BarterDEX and Decred’s plan. Komodo Platform’s BarterDEX has already completed more than 120,000 atomic swaps, directly trading cryptocurrencies without the use of a proxy token, and instead charging a trading fee.
Stadelmann explains, “While both projects use a similar approach towards atomic swaps, Komodo has a small upfront fee of 1/777 for the taker.” This means any trader taking liquidity out of the market pays to do so. Stadelmann added, “We have been a pioneer of atomic swaps and have been working on evolving the technology since 2014. BarterDEX allows us to integrate with exchanges, wallet providers, and liquidity partners, giving more options to utilize atomic swap DEX technology.”
Komodo is ahead of Decred in terms of DEX development, but it also takes a more integrated approach to working with larger centralized exchanges. This means while BarterDEX may offer more liquidity and choice as its partnerships come through, it isn’t a DEX that addresses issues around coin listing prices and potentially unfair advantages for high-level traders.
What makes Komodo’s BarterDEX different is that Decred’s proposal does not involve a blockchain for the exchange process. Instead, it would like going on a bulletin board, finding someone to trade with, and carrying out this transaction through a peer-to-peer atomic swap.
Decred’s DEX proposal outlines directly exchanging coins between two chains (peer-to-peer), with no intermediate chain. Komodo adds this chain as a means to intermediate the transaction and collect fees, creating value for themselves.
According to Yocom-Piatt, this introduces order matching challenges, and in its own way a third party invasion of its own. Yocom-Piatt explains,
“Atomic swaps require no intermediate chain to function, I see no reason to create that intermediate chain and facilitate rent-seeking behaviors. Further, intermediate chains are incentivized to be centralized and have high volume because they collect fees. No DEX to this point has been solely created in the name of the public good, for the users of crypto in the original spirit of crypto.”
Decred’s decision to create a DEX comes at a time when US regulators are paying more attention to cryptocurrency trading. As the project moves forward, it will also need to define its approach to compliance in the ways its defined its role amongst crypto exchanges today.i