Decred founder Jake Yocom-Piatt has introduced a proposal for a decentralized exchange (DEX) to the Politeia governance system. This initiative aims to eliminate exorbitant listing fees, combat front-running by high-frequency traders, and prevent third-party rent-seeking. A platform that successfully addresses these challenges would represent a powerful alternative to centralized exchanges, though Yocom-Piatt acknowledges that the community might still reject the proposal.
Decred was launched by Jake Yocom-Piatt, Dave Collins, Caleb James, John Vernaleo, Josh Rickmar, and Alex Yocom-Piatt in February 2016. It utilizes a hybrid Proof-of-Work and Proof-of-Stake consensus mechanism to ensure that miners avoid becoming too centralized. One of the founding principles of the project has also been its focus on community governance and open development.
This founding principle has manifested itself in the project's launch of Politeia in October 2018. Politeia allows token holders of the Decred ecosystem to vote on the direction of the project by staking their tokens. By using native DCR tokens as a governance mechanism, holders effectively control how Decred funds are spent. At its launch last year, Decred's treasury held approximately $23 million in DCR tokens.
It is an ambitious model of governance, one in which Yocom-Piatt noted could backfire significantly for the project. In the initial post announcing Politeia's launch, Yocom-Piatt wrote, "Politeia allows Decred users and stakeholders to propose, discuss, collaborate on, and fund new projects, initiatives, and consensus changes. If stakeholders exercise poor judgment, it can have serious negative consequences."
Proposals can take two forms: ones that require community support for a change in policy or those that will fund projects from the Decred treasury. The upcoming DEX proposal will fall into the latter category and is estimated to cost between $100,000 to $1,000,000 to build.
In a detailed interview with CryptoSlate, Yocom-Piatt outlined the reasoning behind the proposal. One of the major issues for the Decred founder was the variety of problems he has observed with centralized exchanges.
"When [Decred developers] were meeting with exchanges, we were facing enormous listing fees," he said. "Often times the costs of getting listed on one of the major exchanges was more than the cost of developing the coin itself."
In 2018, Binance, the number one cryptocurrency exchange by trading volume, had reportedly been asking projects upwards of $1 million to get their token listed on the exchange. The CEO of Constellation Network, a crypto-infrastructure project which raised $50 million in an ICO in 2017, placed this figure closer to $6 million.
Though Binance has been tight-lipped about the exact figures, Yocom-Piatt wants to avoid this gatekeeper situation. "I want to move away from centralized exchanges. They have become gatekeepers for a project's success," he told CryptoSlate. "It's not just for Decred either. It applies across the board."
Eliminating expensive listing fees is only one part of the multi-faceted proposal. The platform would also give retail investors a better chance of successfully trading against high-frequency traders and bot accounts.
"You just can't compete with firms who have already built out sophisticated trading infrastructure, unless you build something equivalent. Then you have only a slightly better chance," said Yocom-Piatt.
Typically, order books on exchanges are managed using FIFO matching, or 'first in, first out.' This mechanism means that the first orders to arrive are the first ones to be fulfilled. To exploit this, entire businesses have been built which provide an automated advantage 24 hours a day, seven days a week. To combat such front-running, the Decred DEX proposal would implement pseudorandomly matched orders in which interested market makers would be shuffled upon order arrival. This would give everyone, even bots, an equal opportunity to maximize their profits.
Additional features of the DEX include the use of atomic swaps, crypto-only trading (no fiat), and trading transparency where all trade data is cryptographically signed and publicly verifiable. For the uninitiated, atomic swaps allow trades to be made between two separate blockchains without the use of an intermediary. Decred and Litecoin were reportedly the first projects to successfully execute such a swap in September 2017.
In the proposal documents, as well as within Decred's Communication channels, members have expressed mixed feelings. Some have commented that all funds from the treasury should only be used for Decred development, while others have explained that the DEX proposal is excessive. A Decred member, nottrunner, wrote:
"[It] seems to me we are taking a cannon to a knife fight if the primary purpose of the DEX is [eventually] to increase DCR liquidity."
Similar responses regarding liquidity were iterated in the Communication channels, as some were skeptical that building out an expensive exchange would get more DCR tokens into more users' hands. In Diar's February 5, 2018 report, they also explained that "less than [one percent] of cryptocurrency trades are facilitated on decentralized exchanges," despite the risk of theft on centralized versions.
At the time of writing, the sector continues to face liquidity issues. According to DEXWatch, all DEX volume from 11 exchanges on February 11, 2019, reached approximately 26,000 ETH, or $3,120,000. Comparatively, OKEx, the number one exchange for trading volume according to CoinMarketCap, reports daily volumes of over $1 billion.
But this is not a point of concern for Yocom-Piatt as he emphasized how easy it is to fake trading volume, "especially in a crypto winter." In a December 2018 analysis from the Blockchain Transparency Institute (BTI), the institute stated that "80 [percent] of the [CoinMarketCap] top 25 BTC pairs volume is wash traded."
Wash trading is the practice of buying and selling an asset to provide misleading information about the asset's trading volume. The practice was made illegal in the United States under the Commodity Exchange Act of 1936 but has reemerged since the advent of unregulated cryptocurrency markets.
Adding to that, the Decred founder said the primary focus for the exchange will be to protect traders from price slippage. If someone is interested in buying one million DCR tokens, for example, the price of DCR will not be significantly impacted in the proposed DEX system. Yocom-Piatt confirmed that several major DCR stakeholders have expressed interest in a platform that prevents such slippage.
Regardless of Yocom-Piatt's motivations behind the proposal, it is ultimately the Decred community who will decide. He explained that the DEX proposal is one of the most significant proposals attempted thus far.
"We want to make a case for this decision-making system," he said. "The governance decision will be written in stone with time stamps, no matter if it passes or fails."
The proposal will open to voting on Yocom-Piatt's stake, and so far has only been open to comments since February 5th. However, if the proposal is passed the co-founder claims that the DEX could be built within six months.
Updated February 20, 12:50 PST: Date for Diar's report was changed to the correct date.
