In blockchain technology, ‘trustless’ is the new buzzword in marketing. But for Digitex Futures, we believe a solid technology-based solution is what will make commission-free trading a new standard for exchanges.
As it goes in business, you get people’s attention by promoting a certain word or phrase about your product. The crypto space is no different when it comes to marketing.
The distinction being for blockchain technology, the tech has to meet the hype, even when the label is technically wrong.
You’re about to learn a blockchain industry secret; no blockchain centralized or decentralized is trustless. Mind blowing, we know.
Sorry to let the cat out the bag marketing gurus, but that is the truth of the matter.
Reduced-Trust, Rather Than ‘Trustless’
The main idea behind decentralized blockchain technology is to “reduce the level of trust” you place in the system by reducing the level of human interaction needed to make it function.
The technically astute will just say “well duh, that makes perfect sense.” But for those not in that pool of thinking, here is how trust relates to the blockchain. Whether you’re using an open (decentralized) or private (centralized) blockchain, at some point a human being had or will have some level of interaction with it.
The question is how much trust you place in the person(s) not being a bad actor. For example:
- Could the coder program a backdoor into the system to steal the money?
- Could the founder(s) just decide to take your cryptos and leave one day?
- Does the platform hold your cryptos or do you control your private keys?
- Could a government pressure the platform to freeze or confiscate your funds?
These questions showcase varying degrees of trust a blockchain can have because at some point there is a human element.
Yes, reduced-trust is really what blockchain technology should be called. But conceptually it doesn’t make sense to most people as it relates to technology. And it’s a much harder idea to sell people on.
The Benefits of a Centralized Exchange
Truth be told, there are advantages when it comes to having a centralized exchange. In the world of trading, speed is everything. The processing time on a centralized exchange in comparison to decentralized exchange can be seen as night and day. This helps to make for real-time trading in addition to the following:
- Dedicated central servers hosting matching engines make it easier to use sophisticated trading tools and strategies
- Frontrunning of large orders can be prevented because central servers are private
- Central servers scale much easier
- Using leverage traders can optimize their trading account
- Margin trading on a centralized server is possible
- Proprietary central server cost of off-chain transactions is practically free
Yet, even with this list of pros, users of a centralized blockchain still have to face the facts that this type of platform comes with trade-offs. Namely, how much trust must be placed in the human element.
Decentralized Exchanges Still Have Challenges
For all the “decentralize everything” talk we use to hear back in 2015; people have started to face the reality of implementing blockchain technology. It’s not just saying “blockchain hocus pocus” and then magic happens. Its current state doesn’t work for all applications or industries either.
When it comes to exchanges, blockchain technology still has a few issues. For example:
- There is still no scaling solution for on-chain transactions on-par with a central server
- Slow on-chain order book prevents real-time trading
- Frontrunning on large orders could happen because of public on-chain view
- The cost can be higher with on-chain transactions
- Reliability is still an unresolved issue
- The benefit of margin trading on contracts is not yet possible on-chain
A decentralized exchange may not have all the bells and whistles for some in the trading community. But that doesn’t have to be a deal breaker. After all, the technology is open source and therein lies the beauty of blockchain. You can adapt the technology for what you need.
Digitex Futures Reduced-Trust Hybrid Model
A simple but consistent fact of blockchain technology, there’s no escaping the trade-offs between speed and security when making any improvements. So how do you create the right balance of trust in a crypto futures exchange?
Digitex Futures approach is simple. The development team isn’t trying to reinvent the wheel. Instead, they’re combining the needed features (speed and reliability) of a centralized server with the security and abilities of a decentralized blockchain and its second layer technology.
Using the Ethereum blockchain and smart contracts allows the exchange to reduce the chances of human manipulation making it a more reduced-trust platform:
- Digitex doesn’t hold or control the funds of clients on the exchange
- We don’t hold the private keys of our clients or have access to their private keys
- Digitex has no ability to freeze or seize any funds
The centralized exchange will function as an Oracle. This side of the house is what provides the speed and reliability needed in a futures exchange.
The Oracle Will Communicate with the Smart Contracts to:
- Update available balance of a trader
- Provide outstanding margin liabilities
- Account for profits and losses
In addition, to lower the cost of gas, updates are only done on-chain when withdrawals are made for DGTX, the native utility token.
To reduce the attack surface made when the smart contract communicates with the exchange, Digitex is being proactive in addressing possible issues. The smart contracts are limited in what functions they can perform as stated.
However, if someone did hack the exchange to add a fake amount when the smart contract requested a withdrawal, it wouldn’t work. The exchange recalculates and matches all the trades from the last account balance update. The hacker would have to know each counterparty and have all the right timestamps. So, a bad actor can’t fudge the numbers to pull more than they really had.
As an added security feature, traders can use the browser plugin Metamask. It requires no personal identifying information and uses a signed blockchain transaction which verifies that the same person made the deposit.
Will there ever be a 100 percent trustless blockchain? Maybe or maybe not. But until “reduced trust” can sound as catchy as trustless, marketing folks will certainly continue to promote it in this way. In the meantime, though, hybrid model systems are being explored more.
Digitex understands the key features that traders need and is doing its part to advance the crypto futures exchange market. We’re taking the strengths of a centralized server and a decentralized blockchain and creating something new with unlimited potential.