Since the creation of Bitcoin and the idea of it being decentralized and trust-less by using mathematics in form of cryptography, and clever ideas, we are still yet to see a truly decentralized and trust-less exchanges, that are liquid enough for even the high volume trades.
Introduction to DEXs
DEXs (decentralized exchanges) operate on-chain, like Ethereum, where each transaction is actually written to the ledger. In contrast to Centralized Exhcanges, they offer anonymity, user's freedom of actually controlling their assets via their keys and are hack-proof, since there is no single centralized entity to hack.
Despite those advantages there are couple of drawbacks:
1. Trade Collision - as each block is mined at around every 15 seconds, the same BUY and/or SELL orders can be sent in that time, yet someone can be quicker than You and your transaction won’t be fulfilled. The “who was first” is usually determined by who payed more gas, so that the miners can prioritize certain order, which can lead to …
2. Front Running - which simply put is “spying” on typically high volume orders submitted, but not yet included in the block, copying them over and attaching higher gas input, so that the copied transaction is likely to be accepted, thus leaving the original one, with the need of being resubmitted, usually with a slightly worse price (whether it was a BUY or SELL), as the market offers are likely to change.
3. Liquidity can be a problem – as the assets amount available on the on DEXs are waaaay lower than on the centralized exchanges. To address that there is a way to create link between assets of different DEXs to create Liquidity Pools. Again, a trust is needed to be established so that the risk of malicious behavior for is minimized.
So now when we know WHY certain things can be improved, let’s see what the guys from Injective Protocol have to offer.
Their proposition is - as described a “decentralized exchange settlement logic protocol on Ethereum network”.
Sounds fancy-shmansy isn’t it?
Yet, it is a fairly straightforward way of addressing trade collision issues mentioned before by making sure that whoever was first with their order wins, and making front running virtually impossible.
You may ask - HOW is this possible?
Well, they have introduced something called VDF – verifiable delay functions, which serve as “proof of elapsed time” and “fixed-delay time-lock puzzle”.
“Proof of elapsed time” is a combination of clever cryptographic ideas which create sort of a time-stamp on the order, so that when the list of orders for the next block is created, is it known who created the order first, and if there are conflicting ones, then the first submitted one will be included in the next block.
Now, to prevent the front-running risks “fixed-delay time-lock puzzle” has been put in place.
Basically the orders are being encrypted at the time of sending them out to DEX and later on, when composing the list of proposed transactions for the next block, all of them revealed at the same.
In this way the potential adversaries are not able to copy any of the transactions, simply because they can’t read the encoded transaction in the queue.
On top of that the implemented logic is trustless, therefore there is no central node or entity needed to support it.
It is also resolvable, as it is clear “who was first”, publicly verifiable, since the time stamps are publicly visible and liquidity neutral, as many different liquidity pools can be used by many DEXs, and the solution itself doesn't rely on any specific protocol.
I encourage to read their White Paper attached below, if You wish to learn more, and dive into mathematics :)
So what's next?
As for now You can see the join the waitlist for their Testnet by visiting their website, and check out beta version for instant markets trading at injective.exchange.
As the Team states - “While we are still in the early stages of development, we believe that in the near future, we can gradually combine the advantages of DeFi (Decentralized Finance) and CeFi (Centralized Finance) to meet everyone’s needs. Stay tuned to our updates to find out more about our project developments!”
Further development is being done and scheduled for Q3 this year.
In my humble opinion we are getting at least one step closer to Decentralized Exchanges catching up with the big players in the centralized crypto-trading environment.
I will be definitely keeping an eye out for updates on Injective Protocol.
Until then - May the force of decentralization be with You All ;)
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Official Website: https://injectiveprotocol.com
Whitepaper Link: https://docsend.com/view/zdj4n2d
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