OpenANX: An Analysis
OpenANX bills itself as a “Real World Application of Decentralized Exchanges.” OpenANX positions itself as a new kind of DAO — decentralized autonomous organization — which, one hopes, will not suffer the same fate as The DAO. The Abstract to the white paper reads, somewhat ponderously and obliquely:
With improvements in the Ethereum blockchain ecosystem brought about by state/payment channel developments and decentralized governance methodologies such as boardroom.to, significant functional improvements can be considered to the entire Centralized Exchange Model (“CEM”). Key to this concept is the deployment of a new decentralized exchange platform that allows transparency for end users, holds collateral for participating gateways and provides a predetermined channel for dispute resolution. Current centralized exchanges are opaque, closed systems with limited visibility of security and access protocols, while the first generation of decentralized exchanges fail to adequately provide liquidity and trade volume for users. This white paper provides the pathway to a new, significantly improved platform governed by a decentralized autonomous organization (“DAO”), which in turn shall be developed by the Open ANX Foundation (the “Foundation”), a non-profit foundation. Furthermore, we shall explroe the importance of governance and transparency required of any exchange system in order for it to be effective. The paper will provide an outline of the openANX project (“openANX” or the “Project”), milestones in the development, and delve into the requirements needed to ensure that the project avoids the pitfalls of previous decentralized exchange developments.
(Emphases are mine.)
Unfortunately, this white paper reads as many of them do: jargon-heavy, obscurantist, and inaccessible to the casual reader. I would assume, therefore, that there are important details that I will elide or miss entirely.
The company behind this project is based in Hong Kong.
The company outlines the current problem that it is trying to solve:
The counterparty credit risk of these IOUs is the crux of the problem with unregulated centralized exchanges. The lack of operational and financial data prevents the users from being able to properly assess and evaluate the counterparty risk and more importantly to appropriately price this assumed risk. As it has been shown time and time again, in black swan events, debt defaults, bankruptcies, etc., when there is a lack of information and transparency, market participants tend to significantly underprice the risks they are taking on and therefore do not make optimal decisions and are not being adequately compensated for those suboptimal decisions. On the other hand, in return for assuming these risks, these exchanges provide valuable functions to users — they provide a platform for price discovery, varying degrees of liquidity and a means for the exchange of economic exposure. Participants also avail themselves to a number of critical and practical services — they are able to transact in fiat, store fiat and crypto with varying degrees of security, execute foreign exchange transactions, send fiat remittances, resolve disputes, access help desks, make withdrawals or purchases via debit cards, comply with AML/KYC requirements, etc. And while these services are critical to a functioning exchange ecosystem, it is likely that participants are paying too high an implied economic price for these services as they have underpriced the counterparty risk of the IOUs they have assumed due to lack of financial and operational transparency.
(Emphases are mine.)
I will go through my evolving series of questions of ‘what makes a good token sale’ and analyze this white paper accordingly. Please note that I am in the process of revising this set of questions, and that by the time you read this, I may be using a different set of questions for future analyses; this heuristic is an evolving one.
To review, there are seven questions, or filters, I use, to guage the value of any particular token sale. The questions, and my answers to them, follow.
Does the project require a decentralized technology solution?
This project contrasts itself with so-called Centralized Exchange Models (CEM), by noting flaws in the CEM model:
Centralized exchanges provide valuable services by acting as asset gateways. They allow the offering of multiple levels of market activities that cannot be matched by decentralized exchanges. However, these strengths are offset by a number of signfiicant weaknesses, including the possibility of substantial financial loss, as well as the reputational damage to the digital tokens ecosystem. Each failure, be it Bitfinex or others, impact all users indirectly and reduced the valuation of the market as a whole, by damaging the credibility of digital tokens as a reliable medium of exchange.
The key weaknesses in CEM stem from:
Custody of customer digital tokens (private keys)
Corresponding credit risk to customers upon security or fraud incidents
Lack of consumer protection and avenues for dispute resolution
Lack of transparency to allow customers to assess credit risk
Opaque closed source code and centralized data stores. Each develops their own exchange, deposit, withdrawal and security software; these are typically not open source (with no or limited audits). Metrics and order data within centralized exchanges are not visible to customers, it is unclear to market participants if the reported data is true and complete.
Fragmented liquidity as the proliferation of exchanges results in separate trading pools.
(Formatting has been modified to account for Medium’s limitations.)
Let’s assume as a matter of faith that the foregoing is correct. If the foregoing is correct, then, yes, it’s plausible that a decentralized model can overcome many of these problems. In the words of the authors of this white paper, “The challenge, then, is to solve the centralization problem while avoiding the pitfalls of existing, decentralized exchanges, such as low liquidity and a lack of choice when it comes to ancillary services such as Asset Gateway’s and off-chain assets.”
Does the proposed network have the potential for exponential growth?
OpenANX looks to me to function like a market maker, providing liquidity to transactors. Insofar as market makers generally don’t grow exponentially, no, I don’t see this token platform as having the potential for exponential growth.
Does the token increase in value the more it is used?
It’s not clear to me that this model is one in which the value of the tokens increases the more that the token is used.
Is the underlying technology already built and running?
Given the details provided in the OAX Token distribution model (found on page 17 of the linked white paper), 20% of the tokens are reserved for the Foundation as Treasury, to be used for, among other things, “Strategic Planning, Project Support, Token Swap, Emergency Fund, Development & Legal Fees.” (Emphasis is mine.) So, there is apparently still some development work to be done. It isn’t clear how much of the underlying technology remains to be built.
It’s also worth noting here that this 20% is locked up for 24 months. In conventional North American startups, founders’ equity is usually vested over 48 months (4 years). It’s not clear what the de facto standard is for cryptocurrency projects.
Does the company or team have first mover advantage? If not, does this matter?
No, as the authors of the white paper readily admit, this kind of model has been tried, on a centralized basis, before. The white paper authors make good points about the weaknesses of centralized exchange markets, and claim that their decentralized model is a more robust and flexible one.
Do the team’s assumptions about potential token users make sense?
I think so. Those who need this kind of service are likely willing to buy tokens to avail themselves of the service, and benefit from it.
Does the team have the technical knowledge and the management experience to complete the project?
The founding team is composed of seven people, who, from the biographies provided at OpenANX’s ‘team’ page, have experience in bitcoin, blockchain and related technologies.
It’s not clear to me what history of successfully completed projects they have, if any.