The World Will Need A Fast Truly Decentralized Exchange To Keep Up
Recent news of TD Ameritrade’s investment in a futures exchange, Coinbase’s $8B valuation, and Web 1.0 mainstay Yahoo Finance, is offering a cryptocurrency chart.What does this tell the market? For starters, that crypto is steadily moving into mainstream finance.
The NYT recently served up this promotion from Visa. It’s hard to remember a time when Visa wasn’t a household name. But, if you can imagine it, even Visa was once a new technology offering faster transactions compared to the standard - at the time - check transactions. Now, consumer transactions and decentralized exchanges are very different, but the appeal is the same - fast is good, slow is bad.
However, current DEXs remain far too slow to be appealing to the masses. The main challenge is none of the 200+ DEXs in operation can solve the challenge of transaction speed with their current technology. In other words, they will never be fast enough. The implications are profound for the DEX market. If transaction speed isn’t fast enough, investors will see a range of undesirable results - price slippage, etc - and no matter how well a DEX is designed to curate the user experience, it’ll never generate the volume needed to achieve significant liquidity. So, even after the success of IDEX and Kyber and others, the collective share of all DEXs still hovers around 1% of global crypto transactions. All of this is reminiscent of the “Slowskys” commercials for Comcast about ten years ago.
A DEX with significantly less latency than current DEXs will be the single most important innovation in our space. Imagine for a second a future where a $1T (or even a $10T) crypto-economy exists. Where a decentralized global economy integrates across every industry that uses data as an “asset”, from retail to healthcare to finance to the governance of nations. Where an infinite number of tokens (and token pairs) power finance and e-commerce and global supply chains and on and on. Where the potential scope of the crypto-economy and the related liquidity demands mirror today’s global economy. Unless we find a way to innovate the range of speed and low latency expected in today’s enterprise-scale operations, we’ll never reach this future state. In a world powered by the centralized Web, we need to eliminate the risks inherent in decentralized systems while still reaching transaction speeds comparable to the millisecond-per-transaction NASDAQ.
The reason why there isn’t currently a DEX fast enough for the requirements of a mainstream decentralized economy is fairly simple to explain.
The DEX I/O dilemma in a nutshell
As you might expect, a DEX uses a blockchain as a general accounting ledger. As an exchange, a DEX also uses an order book to match buyers and sellers. The challenge is general ledgers and order books solve two vastly different problems: General ledgers record the movement of assets from A to B. Order books, on the other hand, join buyers and sellers. This presents an I/O challenge existing DEXs can only solve with off-chain components. This leads to inefficiency, which leads to a higher fragmentation of trust and higher fees. As the off-chain order books are hosted on a centralized database, the net effect is a profoundly fragmented ecosystem of liquidity.
While the endurance of CEXs and the related lack of DEX adoption can be partially attributed to the success of brands like Coinbase in the US and Huobi in Asia, DEX as a category will never reach widespread adoption among investors if throughput remains in the 15+ tx/s range.
Innovators in the DEX space have tried to focus on liquidity but almost all employ off-chain solutions. The primary problem remains the bottleneck created by the difference between general ledger and order book processing.
The need for speed - where is it?
The problem with DEXs has always been speed. The good news is we can isolate the cause of the problem which means we can solve it.
While conventional exchanges like NASDAQ match buyers and sellers on a centralized system, they lack all the security and privacy advantages of decentralized system design so well explained elsewhere.
Centralized exchanges (CEXs) like Coinbase, can exchange limited crypto-to-fiat pairs (such as BTC-USD) and do provide an onramp from fiat to crypto—but, ultimately, they also lack all the advantages of the blockchain because they aren’t actually running on a blockchain. They charge huge listing fees, plus they are subject to tampering, and only list a small percentage of available tokens and token pairs. The really amazing thing is none of the current DEXs are truly decentralized either.
What’s an investor to do?
Today, whether you’re using a CEX or a DEX, you can only trade with a limited pool of liquidity, a limited order book, and a limited set of token pairs. It’s not technically possible to trade the full range of pairs even in today’s relatively small market of tokens. The typical workaround sees investors creating accounts on multiple exchanges, exposing valuable information to data breaches and outright theft while settling for a lousy user experience. Order books often don’t have access to deep enough pools of liquidity to complete trades without price slippage. In this nascent market, caveat emptor reigns supreme.
So how do we evolve the DEX space?
Today’s cryptocurrency market is about the same as the market cap of Netflix (~170B as of Sept 2018). Today, the primary use case for a DEX is trading. But the lack of liquidity, the fragmentation of liquidity, the lack of a truly decentralized DEX leaves unsolved the potential for so much more. In a future multi-trillion-dollar crypto-economy, crypto begins to be an integral part of much more than just cryptocurrency markets. We will see an e-commerce industry where DEXs enable the instant trading of an infinite number of token pairs. A gaming ecosystem powered by millions of tokens, each one representing an asset, an artifact, even an identity/avatar. The potential for a token-based economy that mirrors the size and scope of the existing global economy is just around the corner.
Finally, I referenced the Visa ad earlier because it demonstrates the appeal of speed in all types of financial services. Visa also suggests another observation: The cryptocurrency market is so new. Like the pre-Visa days, the infrastructure to truly power trillion-dollar industries doesn’t exist. But it will. Soon, an ambitious group of talented developers with a vision will create a fast DEX, a DEX fast enough to power not only the next era of the Internet but a new era of global prosperity.
About Quoc Le
Quoc Le is a successful entrepreneur, co-founder of Quanta. He founded his first startup, Ares Network, a web hosting company in 1999, which he sold in 2006. Soon after Apple launched the iPhone in 2008, he built a real-time mobile-app chess game, partnered with Chessclub.com, and later sold the source code to them. Mr. Le has been a cryptocurrency enthusiast since early 2017, when he started building his custom GPU mining rigs and traded in several exchanges.
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by Quoc Le, Co-Founder, Quanta