Fusotao Protocol Tackles DEX Challenges
Fusotao DEX tooling proposes a more cost-efficient solution to zk technology
Fusotao Protocol is an Appchain Candidate in the Octopus Network with the ambitious mission of solving some of the most significant issues DEX users face today. Fusotao seeks to give traders the best of all worlds — a seamless CEX-like user experience in a decentralized environment with trading privacy, minimal gas fees, and lower trading costs.
CEX Challenges
Centralized exchanges (CEX) may facilitate growth and adoption with a user-friendly interface, but as the old saying goes, “not your keys, not your crypto.” CEXs save your balance in a hot wallet — They hold the private keys to that wallet. If hackers breach a CEX, they can retrieve the private keys and drain your wallet.
CEXs also have privacy issues. Know Your Customer (KYC) procedures acquire users’ private information. As governments worldwide struggle with how to regulate cryptocurrencies, we’re seeing the ability of governments to freeze CEX users’ crypto accounts and obtain users’ private information.
Decentralized Exchanges (DEX) were developed in response to combatting the centralization of CEX. Examples of popular DEXs are Uniswap and SushiSwap. DEXs are essentially dApps that facilitate peer-to-peer market transactions, eliminating the gateway of a centralized third party.
DEX users are always in control of the private keys to the wallets they choose to use to interact with the DEX. And DEXs typically do not require KYC procedures, protecting users’ private information. But DEXs have their own set of challenges.
Current DEX Challenges
While DEXs embody the sovereign spirit behind cryptocurrency, there can be unpredictable costs to using a DEX (among other issues) that DEX developers are consistently attempting to resolve with more innovative approaches.
There are currently three general DEX styles — Automatic Market Maker (AMM DEX), DEX Aggregator, and Order Book DEX — and many hybrids.
AMM DEX
An AMM DEX is an on-chain exchange that executes trades automatically, replacing traditional order books of CEX with liquidity pools — crowdsourced asset pools that provide liquidity and reward its providers with yield.
Anyone can provide liquidity to a pool by depositing an equivalent value of each underlying token in a trading pair. The amount of value supplied to the liquidity pool must always remain equal for each token in the token pair making up the pool. So, for example, in a USDC/ETH pool, the value of the USDC must always equal the value of the ETH.
Trading pairs in a liquidity pool act as automated market makers. The price is equal to the ratio of the reserves available and continually updated as the liquidity pool’s reserves change after each trade.
Impermanent Loss
Large trades can disrupt the token pair balance in a trading pool, leading to impermanent loss — less value when withdrawn than when deposited for liquidity providers. In short, impermanent loss occurs when pooled tokens lose value because of price divergence between the two assets.
Slippage
Slippage is a price difference between when you execute a trade and when it is included in a block. Slippage can happen in a congested market or because the lack of liquidity for a specific coin results in traders paying more for their order. Large trades against a liquidity pool change the token prices by altering the token balance.
Front Running
Front-running is a significant issue on DEXs. Front running has been around for years in traditional stock markets as insider trading to take advantage of arbitrage opportunities. Arbitrage is an investment strategy used to profit from the price divergence of the same asset.
In any arena where pending transactions are transparent, front-running can come in many forms. For example, bots can get in front of legitimate trades in a queue by bidding higher gas fees to take advantage of arbitrage opportunities at lightning speed. They can even sandwich large orders between a buy and subsequent sell order, take their profits, and manipulate the price to others’ disadvantage in the process.
Malicious miners can take front running to a deeper level due to their clear view of the mempool and ability to organize transactions within a block. A mempool is like a waiting room for trade orders before they are included in the public blockchain. Often referred to as MEV (miner extraction value), these activities undermine everything decentralization was meant to resolve.
Gas Fees
But one of the most universal problems with AMM DEXs for most users is that, because DEXs operate on-chain, when a blockchain is particularly congested, the trading costs of each transaction can become exorbitant. For some retail investors, gas fees can be a barrier to adoption.
DEX Aggregators
DEX Aggregators, such as 1Inch, search for the best rates across multiple DEXs and can split rates across various exchanges. This broader reach can provide users with a more competitive token price and access to deeper liquidity. Aggregators can also make it easier for users in that they don’t have to search around for the best DEX to use. But users can be subject to variable fees on Aggregators.
Order Book DEX
The term “order book” is pretty straightforward. In its simplest form, order books record orders from buyers (bids) and sellers (asks) and match them. The majority of CEX use some type of order book system.
Order book DEXs have several flavors — on-chain, off-chain, and hybrids. An on-chain order book DEX lists bid and ask orders on-chain. Thus its transparency gives clues about the potential price movement — opening up opportunities for front running and arbitrage manipulations as traders and (malicious) miners try to predict short-term price direction.
Off-chain order books offload some trading activity to reduce costs, increase speeds, and add a layer of privacy. However, off-chain order books raise the glaring issue of a lack of trustlessness.
However, as is the norm in the Web3 world, challenges quickly turn into innovations. DEX developers have been avidly seeking solutions.
zk-SNARKS
One method to address both the privacy of transactions conducted via on-chain order book DEXs and the lack of trustlessness imposed by off-chain order book DEXs is the use of zero-knowledge proof cryptography referred to as “zk.”
zk-SNARKS stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge.” Very, very, simply put, zero-knowledge cryptography is the concept of party A proving to Party B that they know a specific set of data without exposing that data.
An example of an advancement in zk technology is the “rollup.” A rollup is a layer-2 scaling solution wherein a single contract holds a succinct cryptographic commitment of a larger chain state. ZK-Rollup technology can take hundreds of transfers off-chain, roll them up into a single transaction, and then submit a SNARK (succinct non-interactive argument of knowledge) back to the main chain as proof of validity.
Although DEXs using zk technology can have significantly lower transaction fees than AMM DEXs, they still have high proving and verification costs. Current drawbacks with zk technology are primarily due to their complexity and early-stage development.
Fusotao Protocol aims to solve the high costs of zk
Fusotao Protocol is an ambitious Substrate-based verification protocol for DEXs which is currently in the process of launching as an Appchain in the Octopus Network.
While not a DEX itself, Fusotao provides an infrastructure for DEXs that allows them to combine the efficiency of a modern CEX in a trustless manner with the decentralized capabilities of a DEX — while avoiding high fees, high latency, and over-exposed trading activity.
Using the execute off-chain and verify on-chain paradigm, Fusotao DEX tooling has similar capabilities to zk proof technology in significantly lowering transaction fees. However, compared to zk DEXs, Fusotao has found a way to reduce proving and verification costs.
Proof of Matching
On Fusotao, orders from traders are executed and proved off-chain by Fusotao’s unique PoM (Proof of Matching) algorithm based on Sparse Merkle Trees. (A Sparse Merkle Tree is a full binary hash tree with a fixed depth which can be used for checking if there is a node that belongs to a certain tree.) Fusotao has found that generating Merkle proofs is much less expensive than zk proof technology.
Hence, Fusotao seeks to give traders the best of all worlds. A seamless CEX-like user experience, with low trading, proving, and verifying costs. And minimal gas fees — orders from users are sent directly to the off-chain matcher and executed off-chain, but users’ assets always remain on-chain and under the user’s control.
What is the $TAO token?
$TAO is the native token of the Fusotao Protocol Appchain. $TAO has utilities on platform, in governance, and for incentives.
Trading Rewards
As a verification protocol for sequential matching systems, Fusotao recognizes that trading activity is at the protocol’s core. Fusotao Proof of Trading (PoT) rewards are designed to motivate transactions. Users who trade on DEXs powered by Fusotao receive $TAO rewards according to the trading volume in one era.
Staking Rewards
As Fusotao is permissionless, anyone can register as a prover to run their own DEX by staking 80k $TAO. $TAO holders can also stake $TAO for DEXs built on Fusotao to earn rewards from the collected transaction fees of that DEX with a minimum staking amount of 100 $TAO. You can even give staking a test drive to earn $TAO rewards today.
Governance
Only $TAO holders can participate in community governance. All $TAO holding community members can vote on proposals that can alter economic parameters on the platform, such as reward distribution or fees. And any DEX that wants to build on Fusotao Protocol must be voted in by $TAO holders.
Interoperability
As an NEP 141 token in the Octopus Network, $TAO is also interoperable with Ethereum, any IBC-enabled blockchain (such as Polkadot or Cosmos), and the myriad of DeFi protocols available on the vast NEAR ecosystem.
Fusotao’s Mission
Fusotao’s immediate mission is to support founders in building their own order-book-based DEXs by using their matching engine and verification protocol. Any developer or founder can build their DEX using open-source Fusotao technology.
Fusotao’s FXDX
Over the long term, Fusotao strives to drive the development of DeFi with high performance and high-security features. For example, the Fusotao team has created a DEX on top of their system, FXDX. Which demonstrates their DEX technology in executing decentralized, fully permissionless, and trustless transactions.
Check out a demo of the Fusatao FXDX here:
Fusotao Protocol is a batch one Octopus Network Star Showcase Winner of USD 50k worth of grants from the Octopus Network Accelerator Program. Fusotao is also the recipient of a USD 50k grant from the NEAR foundation.
What is Octopus Network?
Octopus Network is a multichain, interoperable cryptonetwork built on NEAR for bootstrapping and running Substrate-based, EVM compatible application-specific blockchains, aka Appchains. Octopus Network provides cost-effective leased security, one-stop infrastructure, and a meta-community for its Appchains, positioning itself as an eminent Web3 infrastructure platform.
What is NEAR Protocol?
NEAR Protocol is a layer one blockchain that focuses on developer and user-friendliness. NEAR’s sharding technology is infinitely scalable with low latency, making it easy for Octopus Network to host hundreds of Appchains. NEAR Protocol is rapidly growing as one of the most prominent financial centers in the blockchain world, creating numerous DeFi opportunities for Appchains.
