DAEX: ONBOARDING CENTRALIZED EXCHANGES TO DECENTRALIZED FUNCTIONALITY
Earlier this year, Binance, the biggest cryptocurrency exchange revealed plans to upgrade into a decentralized exchange model by holding a competition to develop a decentralized exchange. The CEO, Changpeng Zhao has severally mentioned that decentralized exchanges are the future of the cryptocurrency exchange. Not long after, around mid this year, another top exchange in the space, Huobi, announced plans to launch a decentralized financial platform Huobi Chain with the goal of migrating their services to the Huobi Chain platform, which will run operations through a decentralized autonomous model. This is a very encouraging trend for a multitude of reasons.The biggest being, the initiative taken by centralized entities in a decentralized space to operate in a decentralized way. This is important because it shows that to remain competitive companies have to walk the talk or else face disruption from emerging better alternatives.
Vulnerability of centralized exchanges
For the longest time, centralized exchanges have come under fire due to their vulnerable asset storage and access model. With cryptocurrencies increasing in value by the day, and with a mission to unseat the current financial system, we should at the very least measure up to existing bank-grade security. However, recurrent exchange hacks have led to losses in the value of millions of dollars. None of these two exchanges, Binance and Huobi, have fallen to hacks previously but the threat is real. The biggest crypto exchange hack is Mt.Gox in 2014 which led to the loss of more than 150, 000 Bitcoins, pegging back the whole space by a year-long bear market and still has not been settled to date. This year, Bithumb has lost $31 million due to hacking. Security has improved since Mt.Gox but this is more a quick-fix rather than a permanent solution because the problem lies in the innate architecture of the centralized exchange.
The future of exchanges lies in a hybrid structure between centralized and decentralized models since both have their unique pros and cons. The main issue with dexs is their low liquidity, and limited token offerings, plus limited fiat to crypto pairs. On the flip side, since the digital assets are stored on the traders’ wallets, dexs cannot be hacked nor can your assets be frozen by governments or centralized exchanges for that matter. To access IDEX, one of the biggest dex in the space, one needs to log into their Metamask wallet or to access Switcheo, one needs to log in to their neo wallet.
The value proposition of centralized exchanges is liquidity, easier to regulate, and more trading value offerings. Ideally, a totally decentralized model would be the ideal solution however their lack of liquidity is not a problem that can be easily solved. The dex with the highest volume currently trades a maximum volume of about $10m daily, whereas Binance the largest centralized exchange manages about $1bn within the same time. The numbers put this gap in perspective and clearly this is not a problem that can be solved overnight. In addition, since centralized exchanges had the first mover advantage and other advantages that come with their centralized nature(such as financial muscle) I find it difficult to see them offset in the near future.
That centralized exchanges are easier to regulate cannot be understated. Currently, crypto has been the reserve of hard-boiled retail investors because the lack of regulation deters large institutions and risk-intolerant traders. Manipulation of Bitcoin price is rampant such as Bitmex undergoing maintenance today, when the platform was seeing an all-time high in shorts. Not surprising, at the same time the value of Bitcoin spiked cutting out many traders from profit.
DAEX is a blockchain project that seeks to create a suite of cryptocurrency exchange operation tools, that can be leveraged by centralized exchanges in order to operate in a decentralized manner. This means that instead of developing in-house decentralized architecture from scratch, exchanges can utilize DAEX’s solutions to achieve their operations of registration of digital assets, trade matching, asset clearing and asset settlement in a decentralized way. By doing this, centralized exchanges are able to optimize their operations and focus on adding value to the customer instead of being weighed down by multiple functions.
Clearing chain/DAEX Blockchain
This is the main feature of DAEX product. Transaction data of all user digital assets will be stored here. This blockchain will be functioning in direct interaction with the DAEX wallet.
DAEX uses a novel consensus mechanism known as Accumulated Signature Proof of Stake(AsPOS). The node stake is the product of the deposit and activity of user wallet. A VRF(verifiable random function) and individual node amounts determine the one to forge the new block to prevent denial of service attack vectors.
Traders will use the DAEX wallet to access their assets. The wallet is also used to access any centralized exchange that is part of the DAEX ecosystem. Currently this functionality, being able to trade directly from your wallet, is only available to traders who access decentralized exchanges. The advantage with using the DAEX wallet is the multi-purpose functionality allowing storage of multiple cross-platform cryptocurrencies such as EOS, Ethereum, VET etc. Current options in decentralized exchanges are limited to native platforms e.g. IDEX for Ethereum and Eth tokens or Waves for Waves tokens.
The fact that DAEX is able to offer the best of centralized and decentralized worlds, in a transparent and secure manner is what makes it particularly unique.
Currently, the project has made appearances in a number of conferences and spread the word about their innovative solution. Already initial contact with over 10 exchanges, setting up legal contracts that will see them upgrade using DAEX. These include
DAEX has already raised some capital in its private sale and is already trading on exchanges LBank, Indodax, BCEX and Allcoin. The public sale is however ongoing.
Deferring crucial core operations to trustless systems that are verifiable is the only way cryptocurrency exchanges can restore confidence in professional conduct. Waves CEO Sasha Ivanov earlier this month mentioned that indeed decentralized exchanges are the solution for fake volumes and other price manipulations by centralized exchanges. I believe DAEX plays a very good role to lessen such misconduct. The fact that DAEX serves a clear role in the crypto ecosystem also means that the value of the token will be less speculative and more driven by utility. This makes it one of the best investments in crypto today.