On June 7, 2018, Decred, the autonomous digital currency, proposed that the crypto industry moves away from traditional, centralized exchanges and towards newer ideas.
Decred suggested that the industry focuses on DEXs (decentralized exchanges), but that the current model for such exchanges is not efficient enough. Decred’s project lead, Jake Yocom-Piatt, provided an in-depth description and explanation of what he thinks the cryptocurrency market needs. He commented on his suggestions, saying that the ‘goal is to structure the conversation so the developer community can step up with real-world solutions. We believe that this call-to-action is long overdue.’ He added that the community could only move forward by ‘putting more power’ into the hands of the individual.
Some main features that Jake Yocom-Piatt would like to see in a DEX:
- It must be architected as a simple client and server, without a corresponding token or a blockchain. This is unlike services like Bancor, which requires the use of the BNT token.
- Server operators never take custody of client funds (this is a standard for many DEX’s)
- It uses on-chain transactions for order fulfillment and rule enforcement.
- Server operators collect no fee for matching orders.
- Order matching occurs pseudo-randomly within epochs.
- Orders placed on the exchange can be internally regulated via rules enforced by the clients and the server.
- Malicious clients are managed using a reputation system based on Politeia, Decred’s proposal system.
- Near-instant exchange for smaller orders can be achieved through a related off-chain Lightning-Network-based network which uses atomic swaps.
- Servers can connect via a mesh network to allow cross-server order matching.
- External services (e.g., wallets) can access a simple client API on the server that provides a data feed, the ability to place orders, and other services.
Jake further stated his motivation for proposing such a system. He pointed out that while DEXs have managed to remove several of the barriers for running an exchange, they have done so mainly by using their own blockchain or token to help collect fees and facilitate transactions. This may solve some problems, but it leaves these exchanges open to high-frequency trading algorithms (HFTs). These can lead to ‘flash crashes’ and distortion of prices.
Jake also made it clear how important zero trading fees are. He pointed out how trading fees are not the necessary incentive for running an exchange. For instance, many services, such as messaging providers like Telegram or Slack, do not take a fee from every user and yet they can still be used by every user. DEXs can be run in the same way.
Essentially, Decred is proposing a decentralized exchange that contains the least friction between clients and users as humanly possible, coupled with air-tight security to prevent fraudulent activity and malicious behavior. While this may sound like a pipe-dream, Decred already has many of the tools needed to create such a model. For instance, their Atomic Swap toolkit and Politeia file system both massively help to achieve this.