Hillrise Research
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Hillrise Research

AMA Highlights: Tacen

By Daniel Dal Bello, Director.
May 10, 2021–9 min read.

On Thursday 15 of March, we welcomed Jae Yang and Clarence Liu of Tacen into the Hillrise Group Telegram chat for a conversation about Tacen exchange and the development of their decentralized settlement layer.

Tacen is a cross-chain privacy-first non-custodial crypto-exchange addressing the demand for markets without KYC — an ever scarcer subset of the exchange business. With their unique approach, they are looking to bridge the gap between speed and security.

Their exchange will integrate with the DFINITY “Internet Computer” for tracking and providing data and intertwines itself in many platforms and ecosystems within the blockchain space.

We were eager to learn more about the architecture of their exchange approach.

In this post, we have compiled key questions and answers from the event.

Ray Reijnders
Thank you for joining us today Jae and Clarence, I’m looking forward to learning more about how Tacen positions itself in the current exchange landscape and how your unique value proposition and strengths play into the demand for non-KYC exchanges.

Can you please start with a brief introduction about yourself and Tacen?

Jae Yang
I’m the founder and CEO of Tacen, we’re a US-based company developing a next-gen hybrid crypto-exchange. My background is in aerospace engineering, I used to write real-time pilot-in-the-loop controller sims and other high-fidelity engineering sims for the rotorcraft industry.

After about 9 years or so, I moved on to an e-commerce start-up, and then I worked in IoT industry at Samsung, then worked in Metal Pay as Director of Engineering.

I worked really closely with the compliance team. Also managed and built many of the backend services for the company. Now, along with the team here at Tacen we’re trying to build a new generation of exchange software that can combine speed and privacy in a compliant way.

Clarence Liu
I have been in the blockchain space for a few years as an executive, and previously a software engineer. I also advise product/BD for Elastos and Opulous projects.

I met Jae at Stanford Blockchain Week in 2020 and really fell in love with the project, we’re building a decentralized settlement architecture that combines fast order books with a decentralized non-custodial settlement.

A general picture of how our architecture works and how DFINITY is used is that the matched signed trades are witnessed/recorded by a decentralized oracle network, we call these the Settlement Data Oracles — (SDOs) for short.

Currently, our plan is to leverage DFINITY to allow scaling of the oracle network and improve the security of the consensus mechanism.

Rowan Zwiers
We’ve noticed your heavy focus on legal compliance — starting operations from a foothold position in the USA with a Chief Compliance Officer as key advisor.

What were the main legal challenges in shaping your current exchange architecture in a regulatory compliant manner and how do you manage future compliance as the legal landscape evolves along with these novel technologies?

Jae Yang
SEC’s chief concern is that of the unregistered exchange and unregistered securities (along with other fraudulent activities). Reading the Securities Act of 1933, Securities and Exchange Act of 1934, you get a good sense of what is exactly the regulation.

The general outline is that if a business lists and markets security, which represents an interest in a company or a debt instrument, etc, then that venue is considered a securities exchange and requires registration under Act 34, which remains the law of the land.

Our compliance strategy and our architecture are designed in a such way that the exchange’s mechanisms are different than one described in Act 34, and, compliance program filters out and only lists bonafide cryptocurrency and utility tokens.

From the FinCEN angles, which is chiefly concerned with money transmission (under Bank Secrecy Act of 1970, and Title III of the Patriot Act 2006), the guidance from FinCEN is fairly clear — if you act as an intermediary in a money transmission (be it CVC or otherwise) you are subject to AML recordkeeping requirements.

The settlement layer we utilize is completely decentralized, and the company that will operate the exchange is not involved in handling custody of money from the traders. I think sticking to the first principles in compliance keeps us grounded in the realities of the regulatory environment.

Ray Reijnders
As you mention, one of the key elements of the Tacen exchange is its community-operated settlement data oracles (‘SDOs’), what is the benefit of making the SDOs community-operated?

Clarence Liu
The decentralized settlement data oracle is not a key element of the Tacen exchange, rather Tacen’s TBD exchange is one of the possible exchanges compatible with the decentralized settlement layer.

You can envision that the decentralized settlement layer provides settlement data services for any compatible exchanges such as Tacen’s exchange, but others as well.

An analogy I like to use is that the same way Polkadot provides a shared consensus mechanism for parachains (bring your own blockchain —Substrate etc), this is a decentralized settlement layer and anyone can bring their own exchange platform.

Ray Reijnders
So SDOs don’t necessarily just apply to the exchange, it applies to the entire ecosystem. Will all incentivization for SDOs take place in the TXA token? And apart from incentivization will there also be a penalization or slash system to prevent malicious actors?

Clarence Liu
One thing I would like to clarify is that the TXA token is a utility token of the TXA Settlement Layer (TXA Project), and does not depend on Tacen for its success, nor does TXA token represents an interest in any of the entities developing it.

The SDOs are community-operated, think of it like a folding at home or SETI at home type of application. The community-operated software is also open-sourced and should be auditable by anyone.

Where TXA token is used in the Settlement Layer is for the purpose of securing the Settlement Layer, to incentivize honest SDO operators to continue operation.

By storing and providing accurate settlement data (what the counterparty in a peer-to-peer trade owes) SDOs secure the community.

Rowan Zwiers
We’re used to projects sharing their open-source code through Github, however, we’ve seen Mr. Yang state in the Tacen community channel that there is a 0% chance of Tacen releasing open-source code via Github while mentioning possible alternative channels such as Gitlab.

What elements of the architecture will you bring open-source and what is the motivation to not use Github?

Jae Yang
Consider the following: If the orders sent to the exchange are correctly ordered (fair-ordering) and re-broadcast to the community, and there are independent witnessing of that, and the mechanism (or rather the matching and execution rule) is published and the resulting executed trade is independently witnessed, recorded, and audited, I think it is safe to say that one can have a black box that operates fairly, and is auditable by the public — that’s open finance.

The smart contracts that comprise the settlement layer, and the source codes that compiles to SDO, will be fully open-sourced. Maybe on Github — but I am not too keen on Github as a company.

Clarence Liu
The key takeaway is that everything is transparent and auditable to a fair degree.

Rowan Zwiers
What important elements are managed by these smart contracts and how are these audits executed, monitored, and made public?

Clarence Liu
The smart contracts manage the escrows and are involved in the “coordinated settlement process”, there will be cross-verification between peers regarding the trades.

The post-trade obligations are actually on-chain, so everyone can audit the data to be assured it's correct. We’ll probably see open-source tools for reporting get built.

Rowan Zwiers
Are there any specific auditing firms you are looking at to audit the smart contracts?

Jae Yang
We are working with two top-tier auditing firms right now, and I cannot say the names.

Ray Reijnders
In the greater scope of things Tacen aspires to build “the backbone of the next generation of decentralized exchange infrastructure” — which requires not only users but also cooperation with trading desks, apps, and traditional players.

How has traction in this field been going, are you currently in talks with external industry players about integrating your SDKs and using your white-glove service with customizable APIs?

Jae Yang
We’re working with wallet developers to understand their pain points, and how we can help with the UX (API also needs a good design to facilitate this).

SDKs wise, what we are doing is to develop iOS SDK to make it easier for wallet developers to integrate with the exchange, and play well with their current setup.

As far as trading desks and institutional players go, we have been blessed with a good amount of interest regarding our commitment to providing top-notch integration service. Basically, you lower the barrier to entry for traders of all sizes, you get a lot of customers.

The chief concern from the big players is whether liquidity is available. By ensuring easy integration, you get that liquidity relatively easily. When the cost of integration is close to zero, what’s there to lose?

Ray Reijnders
What is your strategy with onboarding strategic participants? Will you ramp this up closer to the exchange launch in Q3 2021?

Clarence Liu
Definitely, we will be doing aggressive business development, we are growing very quickly and expect to launch supporting many chains and partners.

We are currently working through our network of strategic partners, it’s quite expansive and we’re in a very good position.

Rowan Zwiers
Tacen integrates novel technologies in its architecture, could you tell us more about how DFINITY and Hedera Hashgraph are taking crucial roles for Tacen — and what other technologies are you possibly looking into to “share DNA” with?

Jae Yang
One of the chief challenges in helping to develop the decentralized settlement layer is that one needs to have several security considerations. One of them is the availability of the SDO, and the second is the provisioning of a secure computing environment. Since it is generally not easy to have a trusted computing environment, having what amounts to a consistent VM execution environment is beneficial for something like the decentralized settlement layer.

It gives the layer additional security. On the side of the scaling issue — improving availability generally will increase security as well as improve the speed of settlement. That’s where I believe that DFINITY’s Internet Computer can help solve those two issues.

Hedera Hashgraph can help because they already have persistent and fair-ordered message queues that are validated by multiple stakeholders. Imagine if you will, SDOs connecting to these, default model for SDOs will be to also have alternate data backends so that there is a redundancy in calculating settlement obligations. We are still considering deep integration with Hedera.

Ray Reijnders
Tacen promises fast order matching through an advanced centralized order-book while keeping non-custodial with decentralized order settlements.

How does Tacen guarantee the sovereignty of its users and fluency in the trading experience — while ensuring no order book manipulation is possible?

Jae Yang
One, the deployed smart contract that collateralizes trader’s funds is trader-owned. The contracts are non-upgradeable, meaning the developer cannot change the rule after the trader has deployed the contract.

Also, there are no administrative or other control mechanisms that touch the trader’s collateralized fund — meaning the exchange venue cannot move or touch that money. When a trader sends out an order, the signature of the order is calculated (you can look at EIP-712 for the exact process) and then we verify, from our API backend, that the origin of the order is indeed from the trader. The exchange software then re-broadcasts (and the community can also actively listen ahead) the order of operations and the acceptance of the submitted orders.

That’s where SDOs come in. Imagine if you will, if an auto accident happened (god forbid) and people gather immediately to take pictures with their cell phones from multiple angles independently witnessing and recording the event. Shorter the timespan between independent witnessing and recording, the better.

As far as ensuring no order book manipulation — unlike DEXes, there is no front running one cannot for example listen for blockchain event logs and pay more gas to get in front.

Rowan Zwiers
Tacen being an upcoming exchange that will heavily rely on its community (the exchange requires robust SDO provided by the community once live).

How do you feel your current community is forming and how do you plan to grow your active community moving forward?

Jae Yang
I always say; the more community involvement in the decentralized systems the better.

I think what I would like to perhaps encourage is to watch this space and get involved in the open-source development when the time is right. There are more ways to help but primarily I think the more eyes on the code the better.

Community involvement is crucial in securing the layer, and I hope that as time goes, we can have something that many different exchanges can rely on.

Clarence Liu
We are also excited about bringing more crypto-related options to the US market and building the community here, which is under-represented and the crypto-space needs more legal-first projects like us.

Hillrise Group supports ambitious Web3 startups with early-stage venture capital and fundamental research.

Tacen is an upcoming privacy-first non-custodial crypto-exchange.

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