Back in 2017, prior to starting Commonwealth Crypto (the precursor to Arwen), most of our team was either writing (award-winning) research papers on network security and cryptography, contributing to blockchain protocols including Bitcoin and Ethereum, or casually trading cryptocurrency. We saw the global impact of hacks on centralized exchanges, and noted that security concerns around exchanges were stifling adoption and keeping significant money on the sidelines. To date, many of proposed solutions to this problem have required substantial trade-offs: sacrifices to liquidity or speed, problems with frontrunning, limited coin support,or scalability challenges.
As experts in security and cryptography, we knew there was a better solution. After a year of heads-down work, we’re proud to announce the release of our testnet trading application, our updated whitepaper detailing our protocol, as well as our first exchange partner to offer the Arwen secure trading solution.
Let’s back up. Consider that $1.5 billion has been lost to hacks of centralized cryptocurrency exchanges to date, with $865 million lost in 2018 alone. Would-be retail traders aren’t entering the market or are holding back on volume due to security risks. Institutional traders either price infrastructure risk into their trading strategies or keep their capital on the sidelines.
As experts in cryptography, the solution to this problem was clear. The value of a blockchain-backed cryptocurrency derives from not relying on a single trusted party. Why couldn’t the same be true for a cryptocurrency exchange?
Arwen is the most secure way to trade on a centralized cryptocurrency exchange.
Today, over 99% of cryptocurrency trading occurs on a centralized exchange or OTC trading desk. Traders still turn to centralized exchanges because they’re still the best way to access liquid markets and trade quickly. Each of these centralized exchanges sits on vast amount of coin, making them a prime target for hackers.
By trading with Arwen, you can maintain custody of coins while you trade on a centralized exchange. You can self-custody your coins in your own hardware wallet, software wallet, or other solution of choice. You don’t need to transfer your coins to the exchange’s omnibus wallet. You don’t need to upload your keys to a third-party webserver.
Arwen brings you the peace of mind to trade safely on an exchange, knowing that any hack or compromising event cannot touch your coins.
Self-custody is already in demand. Hardware wallet sales continue to grow, even in a bear market. From 2016 to the end of 2018, Ledger sales climbed from 30,000 units to over 1.3 million. The market for hardware wallets was valued at $94 million in 2017 and is forecasted to reach a value of USD $392 million by 2023. More institutional funds are exploring self-custody and there is increasing development around the necessary institutional custody solutions to bring traditional asset managers into the nascent cryptocurrency trading ecosystem.
Arwen is capable of connecting all of these custody solutions to the liquid markets at centralized cryptocurrency exchanges.
We’re combining the best of centralized and decentralized systems.
We started working on Arwen back when the notion of a “decentralized exchange” (DEX) was yet to become a household word. (At least not a household word in our houses).
A DEX is peer-to-peer (P2P) trading system that allows traders to securely self-custody their coins. Each trade in a DEX involves a transfer of funds directly from trader Alice’s wallet to trader Bob’s wallet. This P2P approach is great for safeguarding assets. However, today’s DEXs have too few users to produce a highly liquid market.
Liquidity isn’t the only challenge for a typical DEX. Most DEXes require each trade to be executed on the blockchain. On-blockchain execution is slow, typically taking a few seconds to several minutes. In the trading world, even a few seconds of latency can be problematic, given the volatility of cryptocurrency prices.
Aside from speed constraints, posting trades directly on-blockchain comes with another set of headaches: front-running and griefing. Since many DEX protocols broadcast trade details onto the blockchain before the trade has executed, this can lead to race conditions. An adversarial blockchain node can learn the details of Alice’s trade with Bob, and potentially profit from it by front-running Bob’s trade with its own trade. Arwen avoids these problems, because each trade is visible only to the trader and the exchange.
Arwen offers the best of both worlds. The self-custody and security aspects of a DEX, with the speed, scalability, and liquidity of a centralized exchange.
2019 will be the year of atomic swaps.
Atomic swaps are an amazing way for two parties that don’t know each other (or trust each other) to exchange items without cheating each other. Alice gets Bob’s item and Bob gets Alice’s item, OR neither Bob nor Alice gets the other party’s item. Translating this into the world of cryptocurrency trading, this means that atomically swapping 1 BTC for 100 BCH guarentees that: (1) if Alice transfers her 1 BTC to her counterparty, even a malicious counterparty cannot prevent Alice from claiming her 100 BCH, and (2) if the counterparty transfers his 100 BCH to Alice, even a malicious Alice cannot prevent the counterparty from claiming his 1 BTC.
Our founders, a professor and PhD in cryptography and network security, were drawn to the space because blockchains are a technological breakthrough that circumvents a long-standing result in cryptography: namely, that atomic swaps are impossible without the help of a trusted third party. We believe that realizing the promise of blockchain-backed cryptocurrencies demands that atomic swaps be brought into the mainstream. Arwen delivers on this promise, by bringing atomic swaps to the mainstream use case of cryptocurrency trading.
The layer-two blockchain protocol for trading.
Atomic swaps are just one piece of the puzzle. Like the Lightning Network, Arwen is a layer-two blockchain protocol. A layer-two blockchain protocol uses the blockchain itself as a root of trust, while delivering speed, scalability, and security because the protocol does not require that every computation and action be executed on blockchain.
What Lightning solves for payments, Arwen solves for trading.
Using a layer-two protocol means that Arwen trades are just as fast as those on traditional centralized exchange. Trades at centralized exchange trades are fast, because they happen off-blockchain. But, because the exchange is holding all the coins, each trade is only recorded within the exchange’s internal accounting system, making it difficult to recover coins if the exchange is hacked. With Arwen, trades also happen fast, off-blockchain. But each trade executed as atomic swaps in a layer-two blockchain protocol. This means that coins can be recovered, even if the exchange is hacked.
In other words: same speed, more security.
Arwen escrows and trading instruments
Arwen trades are backed by on-blockchain escrows, where each coin’s native blockchain acts as the agent of escrow. (So, the agent of escrow for bitcoins is the Bitcoin blockchain). With Arwen, traders deposit their coins in an on-blockchain escrow, rather than depositing their coins at the exchange. On-blockchain escrows ensure that the trader need not trust anyone, other than the blockchain, with their keys and their coins.
Because Arwen is designed for cryptocurrency trading, it is designed to support as many coins as possible. As a result, Arwen supports essentially all “Bitcoin-derived’’ coins, (including BTC, LTC, BCH, ZEC) as well as Ethereum and ERC-20 tokens. This is wider set of supported coins that most of today’s layer-two blockchain protocols (including Lightning).
Today, we are launching with Arwen’s unidirectional RFQ trading product. In an RFQ trade, the exchange commits to a price, called the quote, before the trader decides whether or not to place an order for the trade. (Request: “How many BCH can I buy for 1 BTC?” Quote: “You can buy 100 BCH, quote open for 1 second”) If Alice places the order before quote expires, Alice cannot back out of the trade and the exchange is expected to execute the trade of exactly 2 BTC for 200 BTC. Each Arwen RFQ trade is a cryptographic atomic swap.
Our whitepaper has protocol descriptions for the other trading products we have in the works, including a bidirectional RFQ product, and a bidirectional fill-or-kill limit order product.
Arwen is more than a protocol.
Today we are revealing the Arwen Trade App, a desktop GUI for executing the Arwen protocols on the user’s behalf using the Arwen Daemon.
The Arwen Daemon is an executable that user downloads to her local machine. We will be open-sourcing this executable in the coming months. Right now, you need to interface with the Daemon through the GUI, but soon you will be able write Arwen bots that directly access the Daemon’s API, without going through the Trading App GUI.Daemon allows the user to engage in the Arwen protocols without trusting a third-party or a webserver, thus realizing the promise of self-custody. The Daemon performs the cryptographic and blockchain operations involved in the Arwen protocols and stores the secret keys used to securely trade against the Arwen escrows.
The Arwen Daemon talks to the Arwen Hub, our secure centralized cloud deployment of the server-side of the Arwen Trading Protocol. The Hub is used by exchanges to execute the Arwen Trading Protocol. The Arwen Hub interfaces with the exchange’s internal order book & user authentication system. Our team can often add support for Arwen to an exchange by interfacing the Arwen Hub to the exchange’s existing production APIs.
Bringing confidence and security to crypto trading.
With today’s release of the Arwen trading app, our whitepaper, and our first exchange partner announcement, we’re elated to add a stronger security foundation to the global cryptocurrency industry. Use Arwen to trade securely via atomic swaps, without compromising on the speed and liquidity you’ve come to expect from centralized exchanges.
We are actively adding new exchanges to the Arwen ecosystem. Please contact us if you’d like us to inquire about integration.
Otherwise, we invite you to try Arwen on testnet, and we welcome your feedback as we continue to BUIDL a more secure way to trade.