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The fundamental problem is that practically all exchanges are credit-based, and decentralized credit doesn't make sense. When you want to purchase bitcoins on
by runeks 9y ago
The fundamental problem is that practically all exchanges are credit-based, and decentralized credit doesn't make sense.
When you want to purchase bitcoins on an exchange, you start out by depositing e.g. dollars on the exchange, thus converting your dollars to that exchange's dollar token (IOU x USD). You then sell your dollar tokens for bitcoin tokens on the exchange, which is super fast because it centrally controls token ownership, and when you want to get your bitcoins out you sell/redeem your BTC tokens for actual BTC.
This system, which is how all large exchanges work, is inherently centralized, because it uses a central debitor (owes USD/BTC to customers) to handle token ownership, which works really well because it puts no limit on performance (as opposed to a system where we use a blockchain to define ownership).
One partial solution is to separate the debitor (funds holder) from the actual exchange: instead of exchanges issuing their own tokens (bitstampBTC, bitfinexUSD, mtggoxBTC, etc.), there would be dedicated issuers (lots of them), and an exchange would constitute a central meeting place, which accepts a specific set of issuers, and to whom people can sign over their tokens in order to engage in a trade. So, for example, a buy order would constitute signing over a token worth the buy order's value to the exchange, which immediately matches it with a sell order, swaps the owner of the matched tokens (after deducting a small fee), and sends the tokens to the buyer and seller.
- oelmekki 9y ago> When you want to purchase bitcoins on an exchange, you start out by depositing e.g. dollars on the exchange, thus converting your dollars to that exchange's dollar token (IOU x USD). You then sell your dollar tokens for bitcoin tokens on the exchange, which is super fast because it centrally controls token ownership, and when you want to get your bitcoins out you sell/redeem your BTC tokens for actual BTC. Wouldn't that be a perfect problem for a smart contract? It could be used to generate such tethering tokens, hold all real coins (ethereum, here, but if I got it correctly, lightning will implement smart contracts in btc blockchain as well in the future), allow for fast token exchanges and then slower withdrawal from the contract stash. Converting fiat to tokens is still the problem, here, obviously.
- giergirey 9y agoYes, I also think exchanging tokens is one of the (few?) situations where a smart contract really is a great solution to a real world problem (as opposed to blockchain hype). Definitely an interesting area, I've been watching this space, here's some interesting ones: On the tethered tokens side, https://decentralizedcapital.com https://decentralizedcapital.com seem to be offering tethered tokens backed by real currencies (and cryptocurrencies on other chains). Not heard much about them though. Implementing full exchange matching rules is pushing at the limit of what's possible in an Ethereum smart contract - https://ubitok.io https://ubitok.io are working on it (disclaimer: I'm involved with them!). As others have mentioned, https://etherdelta.github.io https://etherdelta.github.io is one of the better known decentralised token exchanges - though they do use an off-chain matching engine so it's not totally on-chain. https://oasisdex.com https://oasisdex.com have gone the other way - they're 100% on-chain, but they don't try to do best execution / automated matching - you have to pick an order to trade with.
- zdkl 9y agoIf I want to transform (BTC|LTC|eth) tokens to cash, how does introducing an intermediate token help?
- giergirey 9y agoOK, suppose you want to sell Litecoins for USD cash in a bank account. Now, admittedly, it might be that today a one stop centralised exchange is the best choice for you. But by introducing intermediate Ethereum based tokens, you've broken down the task into three parts, potentally allowing more competition for each part: 1. finding someone willing to exchange your Litecoins for an Ethereum tethered-LTC token 2. finding someone willing to exchange your Ethereum tethered-LTC token for an Ethereum tethered-USD token 3. finding someone willing to exchange Ethereum tethered-USD tokens for bank account USD. Part 1 is purely crypto-currency-based (albeit on different chains), and so should have lower fees than anything involving fiat transactions. It's also free of exchange rate risk, so doesn't need a fully-fledged exchange - should be easy to automated and audit. Part 2 is purely Ethereum-based, and this is where competition should drive fees down to near-zero. Because a smart-contract can run this, there's (potentially!) zero risk of the exchange being hacked / running off with your coins / taking weeks to verify you / being shut down by regulators. Part 3 still involves the ugly movement from crypto to banking. But now it's just going from tethered-USD to USD - so for the processor there's no exchange rate risk, or need to deal with weird and wonderful cryptocurrency networks. And perhaps one day you'll be able to live without Part 3 - you might start to find you can spend tethered-USD in more and more places without needing to go to a bank account ... Disclaimer: I'm involved with the https://ubitok.io https://ubitok.io decentralised Ethereum exchange so I do have a bit of a vested interest in decentralised exchanges! Would love to hear some counter opinions though ...
- ManfredKarrer 9y agoYou define centralized exchanges as banks (as they are usually). A decentralized exchange has a different model. There is no credit and IOU conversion but a direct exchange of BTC to Fiat (or other altcoin). For escrowing the trade amount we use Bitcoins Multi-signature feature so the blockchain is the escrow. Here is a basic overview about the process: https://bisq.io/overview.png https://bisq.io/overview.png