Decentralising trading of a decentralised currency
It’s a cruel irony that those who enjoy the benefits of the first decentralised electronic currency are forced to use centralised exchanges to trade it. Centralisation — the curse of our fiat monetary system — is still an unwelcome feature of the bitcoin and cryptocurrency ecosystem. It’s time to wave it goodbye.
MtGox. It’s not just the name of a defunct business. ‘Gox’ has passed into the vocabulary of the bitcoin world in a way that perhaps no other term has. You might not know what a Zhou Tonging is, you might raise a quizzical eyebrow when advised to HODL, but odds on if you’ve been around even a short time, you’ll understand the long, cold shadow that the world’s first bitcoin exchange casts over the crypto community. Parents use it as a horror story to convince their children to control their own private keys. Grown men weep with fear when it appears in the same sentence as their exchange of choice.
Goxxed. From Gox (verb, intransitive): To be robbed, literally or figuratively, with no recourse, through the idiocy or dishonesty of one who to all intents and purposes gives the impression of being unable to find his own buttocks with both hands, two opposing mirrors and a copy of Gray’s Anatomy. ‘I got Goxxed’, ‘Don’t trust them, you’ll get Goxxed.’ Inherent to a true Goxxing is a kind of existential anguish that such a thing should be able to happen, as well as the obliteration of trust placed in a centralised institution, such as a cryptocurrency exchange. Particularly Mt Gox.
Decentralisation
Decentralisation tends to be a core article of faith for bitcoiners. Anyone who enjoys the benefits of bitcoin’s low-cost, fast and un-interfered-with transfers will appreciate that these features don’t come as standard in the centralised fiat world. Similarly, the predictability of supply is attractive, and is one of the reasons that bitcoin is carving out a niche for itself as a store of value. Whilst commercial and central banks have unilateral control over the money supply, and where they can block or reverse transactions at will, bitcoin offers a unique alternative.
And so it is a source of teeth-grinding frustration that the primary means of trading bitcoin, against both fiat currencies and against other cryptocurrencies, is on centralised exchanges. These have an unfortunate habit of running into problems of one sort or another. They get hacked (where ‘hacked’ is a term that can interchangeably mean being attacked by a tech-savvy thief, or being emptied of funds by dishonest owners or employees). They can be pushed offline by a DDoS attack, often at critical moments in the trading cycle. They can be investigated by the People’s Bank of China, who may decide to impose new rules on them, beneficial for traders or otherwise — you just never know. They may be called upon to release customer information as part of a clampdown on tax evasion. They can demand high payments to list coins, or ignore requests for listing, and can de-list coins at will — effectively denying a community a market. All of these problems and more will be familiar to the average bitcoin veteran.
Types of centralisation
By definition, centralisation of any kind comes with a concentration of power, as well as with a point of potential failure, whether technical or organisational. Back in the early days of bitcoin, MtGox was the ‘centre’ of bitcoin trading in more ways than one. It was the only real exchange: if you wanted to trade bitcoin, that was your sole choice. In the altcoin world, this monopoly persists even today — there are a scant handful of exchanges with the liquidity to make trading viable for different crypto coins.
It was also a centralisation of funds and a target for attackers. For a protocol that enables peer-to-peer online value transfer, Gox centralised risk by pooling customers’ money (protected by some fairly shaky code, it turned out). We may never know how much of the 650,000 lost BTC can be attributed respectively to dishonesty, incompetence, or the malicious activity of hackers. Bitcoin’s protocol is rock solid, but a chain is only as strong as its weakest link. Gox was a catastrophic embodiment of that principle.
Decentralising trade
There have been a number of decentralised cryptocurrency exchanges to date, not least CounterParty and Nxt. These all suffered from one or more major problems. Usability was often low — the user experience was poor or unnecessarily complicated. Moreover, most required that tokens were traded against the native currency (bitcoin in the case of CounterParty, NXT in the case of the Nxt Asset Exchange). They were slow, hampered by block times — you could wait anything up to ten minutes or even more before you knew a trade had gone through. And, of course, they weren’t suitable for trading against USD or other fiat currencies, since there were few, if any, trustworthy providers of blockchain-based USD tokens in each case. In other words, whilst being trailblazing in their own way, they were hardly fit for purpose.
The features that a truly useful decentralised exchange requires at a minimum include:
- Speed. HFT isn’t necessary to begin with, but traders need to know their orders will be executed in real-time — not next-block-time.
- Token-to-token trading. Users want to trade pairs directly against each other, rather than against a third currency: USD-BTC, USD-EUR, etc — not USD-xyz and then xyz-BTC, which introduces unnecessary delays, complexity and additional costs.
- Fiat on the blockchain. This is a difficult one to address, because the centralised fiat system does not interface nicely with the decentralised world of the blockchain. A number of approaches have been taken in the past, none particularly satisfactory. However, traders need a store of value to park funds in, or to remove from the exchange as profit.
DEX and Tidex
A fully decentralised exchange engine has long been the holy grail of bitcoin trading, but it’s a tough one to realise. How, exactly, do you shift inherently centralised fiat money around without centralising it further? There have been a few attempts. Coinffeine is an intriguing and innovative take on the problem. It works by splitting up transfers of both bitcoin and fiat into small slices, and sending them alternately. A deposit ensures that attempts at fraud don’t pay. It’s a neat solution to trustless trading, and operates on a peer-to-peer network like BitTorrent, but it has its limits. It’s nothing like a regular exchange, for starters, and it requires that you’re signed up with a fiat payment provider that supports irreversible transfers — which entails further costs and hurdles.
The Waves platform grew out of the recognition that existing cryptocurrency platforms were not ready for mainstream adoption. User experience, speed and scalability were all limited, and business development — the vital process of actually getting the platforms out to the market — tended to be amateurish at best. And no decentralised exchange would achieve the volumes it needed to be useful to traders without the key features described above.
Waves is a custom tokens platform, based on the idea that the frontier of cryptocurrency adoption will be the relatively basic blockchain functionality of creating and sending simple tokens. These tokens can represent anything you want them to, and whatever you can back them with. In order to trade bitcoin against, say, USD on the Waves blockchain, you need gateways for both bitcoin and USD.
In the case of bitcoin, this means a ‘multigateway’ approach: a set of three or more secure servers that allow users to deposit bitcoin into them and hold it in a multi-sig address. A token representing this is automatically issued for the Waves blockchain. The process is therefore similar to that of depositing funds to a traditional exchange, but is significantly more secure. It’s not perfectly decentralised, but it is distributed — a great improvement on the trust required in the earliest exchanges and still many today.
For USD, there only real method is to adopt the route taken by Tether: holding the fiat in an insured, audited account and issuing a token for every dollar in it — a 100% reserve system rather than a fractional banking approach. A degree of trust is inherent in the approach, but this simply reflects the nature of the fiat system.
Tokens will be traded directly against each other on Waves’ decentralised exchange (DEX). This is achieved by allowing miners to collect transaction fees in any currency they want (they can whitelist or blacklist any they want to include/exclude, so that assets deemed worthless are left to other nodes). All trades are settled on the blockchain, but orders are paired together by individual nodes that act as Matchers. This ensures the speed of a centralised exchange, but the security of a decentralised protocol. If a Matcher goes down or misbehaves, the trade will not go through, but no funds will be lost.
Adding to this approach is Tidex, a new exchange (currently in beta) that will ultimately integrate with Waves’ DEX on the backend. Tidex will offer a familiar trading experience, with multiple fiat options and cryptocurrencies, but it will also act as a Matcher node, providing services directly to Waves’ DEX.
The persistent problems of centralisation within the bitcoin ecosystem will not, by nature, be solved by a single entrant. Decentralised trading protocols are required, many new exchanges, and means of aggregating their orderbooks and arbitraging between them. DEX and Tidex offer one strand of the much-needed solution. In time, others will arise and perhaps the days of centralised trading of a decentralised currency will finally draw to an end.
