Why We Need eXchangily
Not only is a decentralized exchange necessary, we need a specific type of decentralized exchange
By: Eugene Cofie
The use of cryptocurrency began with Bitcoin, a revolutionary mashup of several well-used cryptography, economics and computer science concepts repurposed by a mysterious figure named Satoshi Nakomoto into a method of peer to peer money. The goal of this new way to transfer value was to get rid of centralization by cutting out banks, rent seekers and other middlemen looking to regulate or restrict transactions between peers.
The creation of Bitcoin was inherently about reorganizing commerce on a model that did not require central parties because of the inherent inefficieny in the existing system. It had properties that allowed for immutable and verifiable information you could determine yourself.
Bitcoin quickly flourished as a means of payment on the shadowy dark web and gained notoriety through the media coverage around the collapse of Silk Road because of these properties. In the last three years, the anonymous and untraceable nature of cryptocurrencies has enticed millions of people into the market. The popularity of Bitcoin has sprouted new cryptocurrencies such as Ethereum EOS, IOTA, FAB and Monero, spurred regulation by governments, enticed tradition institutions to invest in the market and created many family dinner table discussions. Cryptocurrency has reached the mainstream.
In this process of mass adoption, cryptocurrency exchanges have become the dominant force in how people interact with crypto and invest in coins. Centralized crypto exchanges create liquidity and act as a clearing house matching buyers and sellers of different currencies. They do this through centralizing the process, taking all user cryptocurrency and fiat money into their possession and matching transactions. Because they exchange fiat currency into cryptocurrency, they also provide customer verification and anti-money laundering functions for regulators. This means they store vast amounts of customer data in addition to all customer funds being traded. Even centralized exchanges that only provide cryptocurrency to cryptocurrency trades must collect customer data.
The top 10 centralized exchanges are generating as much as $3 million USD in fee revenue per day, raking in billions of dollars per year and millions of gigabytes of data per minute. During this meteoric rise, many have stopped to ask: are exchanges compatible with the original vision of decentralization? Does the dominance of centralized exchanges match Satoshi’s vision? And most importantly, are we simply creating new trust inefficiencies instead of eliminating them?
The concept of decentralized exchanges has been created to sidestep these issues, but they suffer from lack of useability, scalability, latency and currency choice. eXchangily is the first DEX to overcome the issues of centralized exchanges and decentralized exchanges.
Centralized Exchanges Are Not Safe
Centralized exchanges have been a necessary part of the evolution of crypto adoption. A centralized exchange model has many similarities to a bank; transactions happen fast because deposits occur outside the blockchain giving liquidity to the market and making it easy to access to new adopters during the infant stage of the technology.
They have allowed individuals to transact and participate in the space easily, but they come with a dark side. There is front-running, identity breaches, server downtime, price manipulation/insider trading, data storage hacks and high transaction fees.
To this point, almost $20 Billion USD has been stolen from centralized exchanges because of these risks. As time passes, the tactics used to hack exchanges become more sophisticated with many predicting 2019 to be the worst year yet. Centralized exchanges are an intermediary that execute the transaction, hold your funds and take custody of your digital asset, making it a honey-pot single point of failure for hackers. To mitigate the damage done, many turn to cold wallet storage for the cryptocurrency, but this does not address the cryptocurrency a user has that is being actively traded.
As a reaction to the hacking issues, governments and regulators have scrambled to create new regulations for exchange owners. After the CoinCheck crypto heist, Japan introduced a licensing system, China and Russia created outright bans, India introduced specific prohibitions. Regulators are issuing warnings about investing in cryptocurrencies in the US, Hong Kong and South Korea. The additional regulatory burden has led exchanges to collect more personal information about their users, creating data breach risks that can be just as valuable to bad actors as money itself. This is a massive problem for users and government.
The ones that profit the most from the set up are private owners who have a monopoly over the industry, immature regulations to oversee their business and data practices allowing them to operate with substandard processes, and carte blanche in creating rules for running their business.
Another quiet negative factor surrounding centralized exchanges is the process by which they choose which coins and tokens are available for trading on their platforms. Many exchanges collect incredible amounts of documentation and information from projects while releasing very little about the process by which they choose listings. Because of this lack of transparency and the central control, it is normal for projects to be chosen through personal favours, relationships and bribes.
Larger exchanges also charge upwards of $10 million USD in fees from projects just for the right to have their cryptocurrency available for purchase, effectively taking the funds a project has raised through their community of users and believers.
What is eXchangily?
eXchangily is a side-chain, peer-to-peer trading platform with an on-chain settlement for withdrawals. Transactions are facilitated through a high-speed trading engine that can process payments and redeem transactions fast.
eXchangily is built on the Fast Access Blockchain.
To provide liquidity and speed to the exchange, eXchangily uses the high speed trading engine with a decentralized coin pool and Universal State Layer (USL) of nodes using proof of stake to provide consensus. The USL acts as a universal side chain for all 3rd party blockchains. Using blockchain adapter technology, the USL connects different blockchains to facilitate the injection of other cryptocurrencies into the decentralized managed cryptocurrency pool in the high performance trading engine.
When a user deposits funds into the exchange, it goes into the USL using a multi-signature aggregation. The first transaction into the exchange is a cross chain transaction of the cryptocurrency that is deposited into the coin pool. This is the only area where there is a reduction in transaction speed as cross chain transactions are low performance. The rest of the transaction happens inside the USL.
There are three types of transactions within the unified layer:
1. Local transaction: refers to the transactions between different accounts of the same cryptocurrency
2. Same protocol-based transaction: refers to the transactions between different currencies created off the same protocol, such as the transactions between different cryptocurrencies of ERC-20
3. Trading of coins with different protocol: refers to cross-chain transactions.
To facilitate trading of cryptocurrency with different protocols, it is necessary to have the decentralized coin storage pool; this is the core technique of the system. Nodes within the USL stake coins to the storage pool that is used for this process. A high speed transaction processing engine matches the trades and executes them. The USL nodes update the address state of user accounts through proof of stake consensus, and the underlying FAB blockchain stores the transaction details through mining. Nodes in the USL are sharded to add additional transaction speed to the process.
The USL alleviates blockchain scaling concerns by running in parallel to the main blockchain, FAB, and allows secure usage of coins, governed by consensus and smart contracts.
The problems of scalability, security, decentralization, and user experience are all be solved by the peer to peer Universal State Layer. The platform has low transaction fees and high levels of security. Users retain control over their funds, their private keys, and their transaction information is transparent and secure. Individuals can trade on eXchangily with both ERC20 tokens and other cryptocurrencies.
EXC holders also receive voting rights for governance and coin addition, revenue through transaction fees that the exchange creates and mining fees triggered by transaction detail storage on FAB.
Other Decentralized Exchanges Have Significant Flaws
At the current moment, there are several decentralized exchange projects being developed. These include OX, Etherdelta, IDEX, Waves, Kyber and more.
The goal for each project is to create ways for people to trade cryptocurrencies directly without a middleman. Being open source, they make it easy for regulators to view the transactions and state of the exchange. They also allow their communities to vote on which coins and tokens the exchange will carry.
But these exchanges all face specific problems.
The first issue is efficiency. Public blockchains are currently not scalable. Decentralized trading systems that use public blockchains suffer low transaction processing ability because of this bottleneck. Slow transaction speed and low liquidity levels are the norm. Exchanges like Etherdelta host order books that use smart contracts on the blockchain for security. They have scaling issues along with high gas costs associated with running the smart contracts of the order books.
Kyber is a very good project that looks to sidestep liquidity issues through creation of a liquidity network called Kyber Reserves. Kyber Reserves is a storage of coins by third parties and Kyber to provide liquidity to the network. Kyber Crystal is a token received by outside parties in the Kyber Reserve system as a fee to provide liquidity in coin exchanges with their coins. Kyber Crystal would only be in demand if there are many Kyber Reserve Managers; this would only happen if the Kyber Reserve System is profitable for Reserve Managers due to a high user rate competing for liquidity. The problem with this implementation is that users will not get the best conversion rates on coins because of the need of the network to keep the Reserve system profitable so that Reserve Managers continue providing liquidity.
Some Ethereum based exchanges have major issues with miner front running.
“The front-runner sets the gas price for their transaction to be higher than that of the target transaction. Given the inherent limit on gas consumption for each Ethereum block, a rational miner will prioritize transactions that pay a higher price per unit of gas to maximize the value of their block reward. It follows that by setting a higher gas price, a front-runner can generally expect miners to give their transaction higher priority than the transaction they are attempting to front-run.”
This is especially an issue that IDEX faces as it has high gas costs and slow transactions.
Ox has flaws with decentralized governance and decentralization. Their project has no outline for how the exchange will be governed. Additionally, Ox’ compliance with regulations is handled by one of its relayers Paradex. Paradex is owned by Coinbase, one of the largest centralized exchanges in the world.
Cross- chain transactions are another complex issues that has not been solved by decentralized exchanges. This severely limits the type of cryptocurrencies can be traded on a decentralized exchange. Exchanges such as Etherdelta and IDEX only trade Ether and ERC20 tokens, missing major coins like Bitcoin or Monero.
There are also exchanges that purport to be decentralized but are not. Bancor experienced a security breach resulting in a $13.5 Million USD hack in July 2018. As a result they froze transactions on the network; they are a centralized exchange.
Because of all of these severe issues, a new decentralized exchange model is needed.
Why eXchangily ?
We are beginning to move into the next phase of cryptocurrency adoption. Institutions and everyday people have entered the market. We need a new way of transacting that is transparent and able to fall in line with the needs of regulators and governments instead of regulators being in contention with centralized exchanges. We need a way of transacting that maintains the speed of the network without sacrificing data security or user control. We need a way of transacting that is truly decentralized, with everyone having the ability to receive the financial rewards of transactions.
Shortly, various cryptocurrencies will be used as a means of payment, which can be easily traded to meet the daily needs at both enterprise and individual level. Therefore, establishing a high performance decentralized transaction processing system has long-term implications for the health of the blockchain ecosystem. We need a new kind of decentralized exchange (DEX) that can trade all kinds of cryptocurrencies (not just ERC-20) in a fast, efficient and decentralized way.
