Jake Yocom-Piatt, Decred’s lead organizer, first proposed this kind of exchange in a blog post in June 2018. Since then the idea has regularly been the subject of discussion within the community — it even has its own chat channel.
Decred’s DEX Proposal
The proposal’s rationale is that tooling and infrastructure for permissionless exchange of cryptocurrencies augments their utility. With the appropriate tools, exchange intermediaries (and their fees) can be avoided altogether. The problem is that there is no incentive for anyone to build such infrastructure without incorporating a method through which they would profit.
Decred is in a position to fund the production of this kind of DEX as a public good, without needing to turn a profit from it, because it has Treasury funds that are continuously replenished from 10% of the block rewards — and a mandate to spend these funds on open source cryptocurrency software for the public benefit.
This obviates the need to incorporate a token and design the system around giving it value.
The proposed DEX would have no trading fees. Its servers would not take custody of funds but instead facilitate the matching of orders between parties who then make the trade directly through an atomic swap. Having all of the trades occur on-chain would enhance the transparency of the exchange’s operation, it would not be possible to fabricate volume.
Another significant feature is pseudorandom order matching within epochs, an approach which is designed to make it much harder to gain an advantage from High Frequency Trading tactics. Removing the advantage of bots with low-latency connections would make the exchange fairer by preventing this kind of front-running. Reducing the advantage of HFTs, along with the fact that participants retain custody of their funds at all times, could make the prospect of leaving large orders open more likely and improve liquidity.
The proposed model also has no place for a gatekeeper that can decide which coins to list or charge a fee to list coins. Any coin can be added to the DEX as long as someone is willing to code the integration. It is then up to individual server operators to decide which of the available/integrated coins they will list.
Direct permissionless exchange has clearly been part of the plan for Decred for some time. The point of the DEX proposal is to make it easy for anyone to spin up a DEX server, as easy as deploying any open source software. With atomic swaps, we already have the tools to make these trades ourselves, what’s missing is a service that matches us up with people who want to be on the other end.
Will Decred’s DEX Actually Happen?
It is Decred’s stakeholder community that will decide whether to move forward with funding this DEX infrastructure.
The Decred Treasury is well on the way to becoming a fully decentralized autonomous entity, so even as a key founder and the project’s lead organizer, Yocom-Piatt, has to propose this through Politeia and hope that enough stakeholders vote with him to take it forward.
The proposal appears to be quite controversial in the Decred community, with early comments on the proposal on Politeia expressing concern about the size of the required budget and asking whether it is something that Decred’s Treasury should be funding.
There is an argument that building the infrastructure for a free and open decentralized exchange is out of scope for Decred’s Treasury because it doesn’t directly benefit DCR, or at least no more than any other coin. The DEX may fail to gain traction, and if it does take off there’s no guarantee that people will use it to trade DCR — other coins could benefit more.
Concerns have also been raised about such an exchange possibly exposing server operators or the project to regulatory action, following the SEC’s move against EtherDelta. It should be noted that the case against EtherDelta was brought over the trading of unregistered securities (i.e. ICOs, including some that had been explicitly called out by the SEC as unregistered securities).
Decred contributor xaur, of Decred Journal renown, has been cataloguing the various pros and cons that have been mentioned for the proposal in a repository, which is open for input from other community members.
As Decred’s stakeholders have decision-making power, it is important that they be provided with good information upon which to base their decisions — and the project has a number of initiatives which address this need.
Following a discussion period where the proposal is discussed across various platforms and the owner can make revisions, voting will open for one week. In response to the discussion on this proposal, Jake edited it on February 19 to reduce the scope (removing the reputation system component from the minimum viable product) and reduce the upper bound of the budget which can be requested (down from $1 million to $250,000).
Decred holders who have time-locked their coins in exchange for voting tickets will decide whether or not to approve the proposal. Each ticket that is live when the vote opens can vote “Yes” or “No.” For the proposal to pass, it has to meet an approval threshold of 60% “Yes” votes, and to be voted on by at least a 20% quorum.
Voting with skin in the game is Decred’s method of making all major decisions about the blockchain and project.
If the DEX proposal is approved, it would trigger a “Request for Proposals” process in which interested teams of engineers would be invited to pitch or tender to do the work. Each of these proposals would then be open for discussion for some time, before a second stakeholder vote to select the winning bid would begin.
When this vote closes, we will find out if Decred’s stakeholders have the will to embrace funding such a major project. This decision comes at a time when low market prices have seen the Treasury’s spending power shrink from a USD equivalent of $45 million when the blog post was published in June, to around $10 million today (despite a steady increase in the DCR balance from 500k DCR to 610k DCR).
The outcome will also tell us something about how Decred’s stakeholders see its place in the ecosystem.
Approving this proposal would signal that stakeholders want to see the project making bold moves that advance the whole space. If the proposal is rejected, this would imply that they favor a more conservative approach which reserves funding for core development work, or that the price tag is just too high considering the current DCR exchange rate.
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Contributed by Richard Red
Richard Red is a Decred contributor who writes about cryptocurrency and blockchain projects that are doing something interesting with regard to governance.