Sirwin
Sirwin

How I learned to stop worrying and love the Decred DEX

By Bochinchero | bochinchero | 15 Oct 2020


I initially set out to do a single post that was essentially a combination of shower thoughts in long form for the Forward Thinking Friday threads on the Decred Reddit. Unfortunately, it got a bit out of hand and I’ve decided to split it into multiple posts that I’ll continue to write over the coming months/weeks. This is cross posted from the FTF thread of October 9th.

Just putting an obvious disclaimer here… I unfortunately lack the skills to contribute to the fruition of any of this in a meaningful way, what is discussed below is pretty far out in the shower thought territory, so please go ahead and tell me why I’m wrong, or just ignore it completely - I’m fine with any of these outcomes.

 

Background

 

When it comes to technology and governance, the Decred team has done a fantastic job and delivered what I consider to be a base layer that is second to none. Given what is already or nearly in production, and what has been hinted as in the pipeline, there is an incredibly solid foundation to be leveraged by those with initiative and the technical prowess to build on top of the protocol.

That being said, at this particular junction, the market seems to disagree with Decred stakeholders on the project’s value. From the supply side, we’re undergoing a period of relatively high inflation, given how the fixed emission schedule is a core part of Decred’s social contract, it’s undesirable and very unlikely that any alterations to this will get stakeholders buy-in, and personally, this is something I would vote against.

On the demand side of the market, it seems like traders, institutional and value investors do not want to meaningfully commit to an asset that has such immature market infrastructure. On the other hand, those who could build or integrate their businesses on top of the protocol may be skeptical due to the apparent lack of interest in DCR from retail and/or institutions.

Willy Woo just a few days ago talked about about Decred, specifically saying it needs more liquidity, traded volume, exchange listings, futures markets, custody providers, and this echoes what a few high profile advocates and evangelists for the project have said in the past. Obtaining support for most of these services through established providers is outside of our control as a self-funded open source project and community. Decred doesn’t have VCs with deep pockets backing it to get DCR listed everywhere hours after the airdrop, and using any amount of treasury funds to lobby our way into any of these is the antithesis of the Decred ethos, or at least what I perceive it to be.

Unfortunately, great tech alone doesn’t seem to do the trick in this market, but at this stage in the game this is something we should expect and learn to live with. Ultimately the advances in Bitcoin and Decred enable the disintermediation and disruption of the bureaucracy and middlemen in legacy financial systems. We should be aiming higher than settling for the removal of one set of gatekeepers to subject ourselves to another just because there’s slightly less friction than with their legacy counterparts.

Hopefully I don’t go into too much of a rant, but I think what is being developed around the Decred ecosystem serves as solid building blocks for addressing these issues in a way that is fair, permissionless and censorship resistant.

 

Liquidity begets liquidity, or so I’ve heard

 

I went down the Decred rabbit hole and committed to be a long-term stakeholder a few months into 2018. At the time, volume and order book depth wasn’t great (has it ever been?) and the main place to get DCR was Bittrex. Shortly after it got added to Huobi, OkEx and a few months later, Binance. Two years later, liquidity is still a pain point cited by many. Throughout this time, a few very loud voices have been constantly moaning about the lack of listing in the hottest exchange, initially it was Binance, now it’s Coinbase.

Is it likely that a Kraken or Coinbase listing will somehow bring improvements in this front and solve this shortcoming? Or will we be spreading our already thin order books across even more pairs and making it worse? I understand the appeal in potentially getting exposure to a larger user base, but I don’t think the approach that every other project out there thinks is best is something that we necessarily want. We are not in 2017 anymore and being listed in these exchanges does not make us part of an exclusive club, they’ve had to become ERC-20 casinos to remain competitive as Binance and now Uniswap have been slowly taking over their slice of the pie.

Something else to consider in this topic is what Chris Dannen brought up in the last Rough Consensus episode, protocols that offer the kind of fungibility that we hope Decred will have after the next release will likely be increasingly toxic to business and institutions that deal with fiat and are regulated as money transmitters.

Looking at other options, we have engaged market makers before without much success, and to be honest, I don’t think this is the path we should explore any further. If anyone wants to make markets for Decred, they should do it for their own profit, with their own inventory.

I understand that the picture I’ve painted so far seems a bit grim and somewhat of a chicken and egg problem. However, I do think that collectively, as the Decred community and stakeholders, we have the power (and hold the coins) to perhaps not change things immediately, but influence where we’ll be going next as this new market cycle progresses.

This may initially seem counter-intuitive, but maybe Chris is right and the correct approach here is to let Bitcoin take the regulatory heat, while we focus our energy on the DCR/BTC market. But if that’s the case, there are at least 18 exchanges where this pair is listed, which one do we focus on?

 

Enter the DEX

 

I’m not going to cover why the ecosystem needs the DCR DEX,  j-yp did an excellent job with that in the blog post where the effort was announced. However, that post does seems quite prescient given recent events in the cryptosphere. While decentralised exchange protocols on Ethereum have gained a lot of traction over the past year, the majority of these products are developed and maintained by businesses that are susceptible to state or regulatory intervention and have investors that sooner or later will want to see a return on their capital. The outcome of this will be the issuance of a token that can be sold to retail or by introducing trading fees. In addition, the majority of these are still prone to market manipulation, exploits by HFTs and even front running by miners. Given enough time and incentives, I’m sure these kind of exploits will eventually also find their way into the new breed of DEX apps built on novel Layer-1 protocols focused on high TPS, where the minimum requirement to running a validating node is to have datacentre-level infrastructure from launch.

The upcoming first release of the DCR DEX is going to be a minimum viable product, as such I think it’s important to manage expectations before going over where I think it could go eventually. From what I understand, the initial release will support BTC, LTC & DCR and will require running full nodes on the blockchains you want to trade. For obvious reasons, this won’t be a great experience for most potential retail users, but I expect this to improve dramatically over time.

Summarizing what has been mentioned in the aforementioned blog post, along with what’s previously been discussed in Reddit, Twitter and Matrix, I believe in the long term the DCR DEX is aiming to have the following features in one form or another:

  • No trading fees.*
  • No KYC.*
  • Non-custodial, settlement through atomic swaps.*
  • Pseudo-random order matching algorithm, ensuring fairness in order execution.*
  • Verifiable volume and order books.*
  • Decentralized through a server mesh.
  • Reputation system based on Politea.
  • Historical and real time data availability via APIs.
  • Support for casual users with light/SPV wallets.

*These, as far as I know, will be available on the MVP.

While initially It may not be the fastest or smoothest trading experience, the assurances that the DCR DEX will eventually provide those that choose to trade there are quite significant:

  • The house doesn’t have an edge if they try to trade against participants.
  • All participants involved play by the same rules.
  • Market cannot easily be manipulated by malicious participants.
  • Censorship resistance and limited vulnerability to state intervention.
  • Participants never give up custody of their coins.

Eventually I see the DEX becoming the dominant protocol for trustless, permissionless and censorship-resistant cross-chain settlement, completely open source and free of any corporate influence and centralisation incentives. While a trade that takes minutes to execute may seem unappealing to most retail users, I see transactions between base layers of this scale being widely used by high net worth individuals, institutions and businesses. In this case, trustlessness is a far more critical feature than speed: think container ships, not parcels.

It’s also worth noting that by choosing to keep custody of our coins when trading we are greatly reducing the attack vector of a centralised business having a significant stake in the network, which is a common threat to Proof-of-Stake based systems..

I know I’m biased and have tried to make as a compelling case as possible, but I think the last point alone should be reason enough for the majority of Decred stakeholders to use the DCR DEX as our main market for buying or selling DCR. By choosing to focus our market activity on to this one venue, we can expect it to have more volume and liquidity than any other DCR pair on a centralised exchange to date.

 

Sounds great, but how does this grow demand for DCR?

 

By itself, I’m not expecting DCR DEX to increase demand, this is high probability outcome that we must acknowledge before we get carried away any further.

That being said, given the strong cypherpunk ethos in both Bitcoin and Decred, one could speculate that there are security and privacy conscious entities who are not comfortable trusting third parties with their identifiable information or coins, the DEX should surely be very appealing to this crowd - and I don’t think there’s any other platform quite like it in the space.

As the protocol matures, I’m expecting the DEX provide a foundational block that I think could be leveraged for building different use cases and applications. This post was originally intended to go over a few of these but I feel like it’s been long winded enough already with what I have covered so far.

I’m hoping to write a bit more of what I think could be possible in the next few weeks for another article, delving deeper into the shower thought territory.

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bochinchero
bochinchero

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