Tag: Decentralization

3 types of decentralised exchanges

On By mehranmuslimiblogIn Bitcoin, Blockchain, EthereumLeave a comment

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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.

 

The case for decentralisation

On By mehranmuslimiblogIn Bitcoin, Blockchain, FintechLeave a comment

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Centralisation came in the second phase of Internet development. In the first phase of the web, Internet services were built on open protocols, but by the time of the new millennium this was rapidly changing to centralised platforms. Firms like Google and Amazon, Facebook and Apple (GAFA) designed software that outpaced the open protocols, and once smartphones arrived, the trend picked up speed.

The centralisation effect

What then happened is that startups found it much harder to grow their businesses online, because of the dominance of centralised platforms that could change the rules at any moment and take away the newcomers’ audience. Innovation has been stifled and the Internet environment is less dynamic because of it. Furthermore, centralisation has aided the rise of fake news and the numerous debates over privacy and biased algorithms.

One response to centralisation might be to impose government regulation on the largest Internet companies, but the problem here is that the web is software based, which means the networks can be redesigned to exploit market forces. So, this type of solution is not of much benefit.

Decentralisation is the answer

Cryptonetworks are a decentralised solution. They are governed by communities and have the potential to outperform centralised platforms.  The reason they are an answer is that they behave in a different way to those platforms that are centralised. For example, when a  centralised platform starts up they do everything they can to recruit users and third-parties like developers, businesses, and media organisations to give the service added value. Facebook is a good example of this. As platforms like this move up the adoption S-curve, their power over users and third parties steadily grows. Again, look at Facebook.

Cryptonetworks operate in a very different way. These decentralised networks “ use consensus mechanisms such as blockchains to maintain and update state, 2) use cryptocurrencies (coins/tokens) to incentivize consensus participants (miners/validators) and other network participants,” as Chris Dixon suggests.

Other advantages are that they also stay neutral as they grow, and use open source protocols, whereas centralised platforms use a ‘bait and switch’ approach. Users have a voice via the community that governs the decentralised network and users work together towards a common goal – community growth and strengthening the token’s value.

Ultimately, the question of whether decentralized or centralized systems will win the third era of the Internet depends on who is going to build the most compelling products. The entrepreneurs working on decentralised platforms are up against the strong cash flow of Google etc, but on the other hand they also have a growing fan base that will provide robust support.  Decentralisation also provides a more level playing field for third-party developers and businesses, and that could well be one of its biggest advantages.

 

 

 

A decentralised business is better for you

On By mehranmuslimiblogIn Bitcoin, Blockchain, FintechLeave a comment

The background of a magnificent city

Let’s start by looking at Equifax. This is a U.S. company, and one of only three, that provides credit reporting on American citizens. Last year there was a massive security breach, which meant that the personal information of at least 143 million was in the wrong hands.

The problem here is that your personal data is centralised when these big credit-rating companies have it, and that means it can be manipulated; by them or by other parties through theft.

If Equifax stored consumer data on a blockchain-based system, the information would not only be better protected, the company itself wouldn’t be able to mess around with it in any way.

The blockchain uses cryptographic hash functions that both encrypt your data and track historical changes to it. Therefore, at any point in time, if any piece of your data is tampered with, you personally will be able to immediately see where and when the information was changed.

However, security isn’t the only advantage decentralised storage of data can bring. The communities using decentralised ledgers are incentivised to show more respect and this contributes to more efficient operations.

The incentive of having a stake in the business

Some platforms, especially those decentralised ones that have utility tokens, engender a sense of community, because every person involved has something to gain by making sure the platform runs for the benefit of all. It also means that they literally have a stake in the company just through token ownership. Also, all the community members can see how a platform uses their personal information and the steps taken to protect it.

There will always be bad actors in any company, and sharing economies are no different, although you’d think that in this particular sector, people are less likely to take advantage of other community members, but we’d be naïve to believe everyone really gets the idea of ‘sharing’. However, in decentralised communities, any bad actors are actively disincentivised, because if things go well, the stakeholders all benefit. If a bad actor contributes to making the company less successful, then they are shooting themselves in the foot.

If you take the example of Uber, which is s centralised company; none of the Uber drivers have a stake in it. They have no incentive to act in a way that makes the company more successful, because all the benefits of success go to the founders and shareholders. If Uber was a decentralised business, with drivers having some form of stake in it, it would be a very different story.

We may see an increasing demand for companies to adopt a decentralised approach, because ultimately it benefits the consumer, and they could be the driving force that increases the use of a new decentralised business model.

 

 

 

The importance of decentralization

On By mehranmuslimiblogIn Bitcoin, Blockchain, Ethereum, ICO, Initial Coin OfferingsLeave a comment

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If you cast your mind back to the early days of the Internet, many of the services were built on open protocols owned by the Internet community. Big platforms like Yahoo, Google and Amazon started during this era, and it meant that centralised platforms, like AOL, gradually lost their influence.

During the Internet’s second growth phase, which largely started in the mid-2000s, the big tech companies like Google, Apple, Facebook and Amazon built software and services that left open protocols trailing behind. The skyrocketing adoption of smartphones helped propel this as mobile apps started to dominate the way we used the Internet. And, even when people did access the open protocol that is the worldwide web, they usually did it through the medium of Google and Facebook etc.

On the one hand, people worldwide benefited from free access to cutting edge technology, but on the downside, startups couldn’t grow their Internet presence without worrying that one of the centralised platforms, like Google, would simply change the game plan and take away any chance of growing an audience and making a profit. This has stifled innovation and in many ways made the Internet less interesting. And, there is a global political aspect to the dominance of centralisation, which we have seen most clearly in the emergence of ‘fake news’ that has turned some social hubs into battlegrounds.

The third age of the Internet

And so we arrive at the third age of the Internet. And as Chris Dixon says in his incisive article on Medium, crypto-economic networks, which in turn owe their existence to the networks developed by Bitcoin and Ethereum, will enable its further evolution. Dixon says: “Cryptonetworks combine the best features of the first two Internet eras: community-governed, decentralized networks with capabilities that will eventually exceed those of the most advanced centralized services.”

The case for decentralisation

First let’s look at the problem with centralised platforms. They have a predictable modus operandi, such as a big drive to recruit users, adding third-party developers and media organisations, and as they grow, so does their power over users. Dixon quite rightly says that when they hit the top of the S curve, “their relationships with network participants change from positive-sum to zero-sum.” And for the third-party platforms, the game has changed from cooperation to competition. So, all the entrepreneurs n the third-party community start to shun the centralised platform.

Now enter the decentralised cryptonetworks. Dixon defines them as:  “networks built on top of the internet that 1) use consensus mechanisms such as blockchains to maintain and update state, 2) use cryptocurrencies (coins/tokens) to incentivize consensus participants (miners/validators) and other network participants.”

Cryptonetworks are also able to maintain a level of neutrality that the centralised platforms can’t offer, and don’t want to either. Plus participants and users are given a voice through the community governance of these decentralised networks. This is available, “both “on chain” (via the protocol) and “off chain” (via the social structures around the protocol). Participants can exit either by leaving the network and selling their coins, or in the extreme case by forking the protocol.”

To sum it up: cryptonetworks align network participants to work together toward a common goal — the growth of the network and the appreciation of the token. That’s why they just can’t keep Bitcoin and Ethereum down, no matter how much they try, because there is a community that believes in it.