3 types of decentralised exchanges

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Cryptocurrencies are making steady progress in the traditional financial system. Their ascendance shines a spotlight on exchanges where people trade crypto assets and a number of them have been found wanting, due to a ‘single point of failure’ that allows hacks to occur.

The solution is decentralised exchanges (DEX), because this type of exchange allows users to keep control of their funds throughout the trading procedure. As might be expected there is more than one type of decentralised exchange to choose from, and there are three formats that are considered the most likely to be the exchange models of the future.

At the moment, decentralised exchanges are being developed in three modes:

  1. On-chain order books and settlements
  2. Off-chain order books with on-chain settlement
  3. Smart contract-managed reserves

On-chain order books and settlements

These are entirely blockchain based and are really the first generation model. With this DEX, every new order or adjustment to an existing order updates the state of the blockchain.

What’s the problem with this type of DEX?

Although it protects user privacy and security this form of DEX makes exchanges illiquid, slow, expensive and unable to operate with other DEX.

Off-chain order books and on-chain settlement

The Ox protocol is good example of this model. It is built on the Ethereum blockchain’s solution for off-chain orders. Execution of the trades happens on the Ethereum blockchain,which means users have control of their funds until the exchange takes place. The order books are hosted by a third party called Relayers. This enables the exchange to maintain liquidity and create a more robust infrastructure for traders. For example, after submitting an order to the Relayer, a market maker waits for an order to be filled, at which point the trade is trustlessly executed on the blockchain.

Smart contract-managed reserves

This model connects the buyer and seller function when there is low liquidity. With smart contract-managed reserves, instead of having to find a buyer for the bitcoin, a user can trade with an external reserve, depositing bitcoin into the reserve and receiving ether in return. Bancor is an example of this model.

Although the existing decentralised exchanges need work to bring them up to a comparable speed with the traditional centralised exchanges, there are several innovative entrepreneurs working on finding the best solutions, and hopefully we will see them next year, if not in 2018.

 

Is U.S. Congress clueless about crypto?

Last week the folks on Capitol Hill made a few headlines and stirred up a Twitter storm. Well, at least Congressman Brad Sherman, a Democrat from California did that with his statement that all crypto and mining should be banned, thus provoking the crypto community into meeting his remark with total outrage online. This was a unique event in itself as the crypto sphere is known for its sniping and clashes. However, Sherman brought them all together.

Whilst Brad Sherman’s message tended to dominate the press reports, for obvious reasons as it makes a good story, other headlines didn’t do much to instil any sense that Congress has finally understood what cryptocurrency and the blockchain world is all about. In fact, to some onlookers it appears as to be the case that Congress is more hostile to crypto now than it was five years ago. For

example, Federal Reserve Chairman Jerome Powell said cryptocurrencies are “great if you’re trying to hide or launder money,” at a separate hearing on the same day Sherman made his astonishing statement. Perhaps he didn’t notice that the FBI had indicted 12 Russians for trying to tamper with the U.S. elections and that the FBI achieved this by tracing the conspirators bitcoin transactions. So much for that argument Mr Powell!

Were things better in 2013?

Let’s remember that when Congress discussed crypto towards the end of 2013, Jennifer Shasky Calvery, then-director of the Financial Crimes Enforcement Network (FinCEN), told bitcoin exchanges and wallets to register with FinCEN and people took this a positive sign. In fact, as Coindesk points out, Calvery’s invitation boosted bitcoin’s price in December 2013 to just over $1,100.

Beyond the big headlines

Of course there is danger in focusing too much on big headlines from the Congress hearings and not looking into the progress that has been made. For instance, regulatory understanding has moved forward even if it hasn’t arrived at an end point that everyone is happy with. Law firms are heavily engaged with it and some staff at the SEC, the Commodity Futures Exchange Commission and other agencies are much more comfortable with the crypto industry than five years ago. In a massive bureaucracy things were never going to move at lightning speed.

And things will keep moving forward. Why? Because there are too many people and too much money engaged and invested in this industry for anyone in politics and policymaking to ignore it completely. In the end those who understand crypto and its potential will outnumber people like Sherman and Powell and we’ll have a Congress that isn’t so clueless.

Who will win the Smart Contracts race?

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Vitalik Buterin’s Ethereum is widely known as the ‘go to’ blockchain technology for smart contracts. But, this week, Ripple’s former CTO Stefan Thomas has thrown down the gauntlet to challenge the leader with a new smart contracts platform.

Thomas left Ripple in May and now he is launching Codius, an open- source project designed by Ripple and released in a beta version back in 2014. So, it isn’t exactly new, but Thomas is positioning it as the core product of his new company Coil.

Coil’s ambition is to change the way websites monetise their content.

Monetising web content is clumsy

According to Thomas, the current way in which web content is monetised is a clumsy workaround that uses adverts, paywalls and data harvesting. His concept uses an interledger. This is an open-source protocol that allows payments to be sent across different ledgers. Basically, it allows users’ browsers to make micropayments to the websites they visit.

How Codius works

How will that work, and how will it affect consumers? Codius allows the use of a “revenue disbursement contract” that will collect revenues when consumers watch a movie, for example. The collected revenue will be paid to all the parties involved in putting that movie online, but it won’t be made in “batch payments’, it will be paid out in a stream of smaller amounts. And, those people who read newspapers with a paywall will make payments via a smart contract that manages payment authorisations and the subscriptions.

Codius has already released an instruction manual for uploading Codius in an effort to get developers to start using the platform immediately, and it seems that the call has been heard.

Who is using Codius?

Telindus, the IT solutions subsidiary of the Belgian telecoms group Proximus has said it will be using Codius to “push forward novel direct e-commerce models.”

Game platforms, Unity, Zynga and Kabam also plan to use it for new gaming platforms. Josh Williams, who invested in Unity et al, and is now creating his own gaming platforms said: “Teams in games and elsewhere are building on Ethereum and running into the cost and scalability issues we’re all familiar with. Codius has great potential in addressing these concerns, and we are eager to work with it.”

Codius offers better scalability

And there is the dreaded word that Ethereum’s team will fear most: scalability. We all know that Ethereum is still working on resolving its scaling issues. It looks like Codius is offering a solution that neatly bypasses that problem. Thomas said: “The people that are reaching out to us are saying, ‘Hey, we’re experimenting on Ethereum. We’re running into scalability issues. It’s too expensive, too slow. It’s not flexible enough. We don’t like writing in this awkward language.’”

It isn’t the only challenger to take on Ethereum, but it looks like it might be one of the strongest contenders to win the race to bring smart contracts into mainstream use.

Fundstrat bullish about Bitcoin for 2019

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Fundstrat Global Advisors, co-founded by Tom Lee, has just published a report claiming that Bitcoin prices will reach $36,000 by the end of 2019. How has it arrived at such a bold prediction? Fundstrat says the answer is mining costs.

Fundstrat’s Quantamental Strategist, Sam Doctor, analysed the relationship between Bitcoin mining costs and price, to come up with the prediction that the price range will fall somewhere between $20,000 and $64,000 next year.

He based his calculations on a Bitcoin Price to Mining Breakeven Cost Metric, known as P/BE, which he claims has “proven a reliable long-term support level.”

A statement from Tom Lee, published on Twitter, said: “We expect the mining economy to grow over the next several years, and project a BTC price of ~$36,000 by year end 2019 based on the historical average 1.8x P/BE multiple.”

The Twitter statement also points out that the rise in electricity costs is slowing and use of power is becoming more efficient as larger rigs with a higher hash power per watt, are now appearing. Plus, mining operations are getting bigger, bringing the benefits of scalability to the scenario.

However, he did point out that there was one risk to the prediction: “a material shift in the trajectory of hash power could change the P/BE support level of BTC price.”

It is interesting that Tom Lee’s personal prediction for BTC was $25,000 by the end of 2018 and both Lee and Fundstrat have been bullish about BTC this year. They also issued a statement in April, saying that 82% of institutional investors believe the price had now bottomed out.

If you own BTC and both Fundstrat and Lee are correct than it will be worth holding on to them for some time to come.