Cryptocurrencies have exploded onto the scene and continue to capture wide public attention – driven not least by Bitcoin’s 250% rise so far this year. The development of the infrastructure supporting this new industry has received less attention but is proving just as dynamic.
As a new asset class, digital assets are following a path which will be familiar to everyone who follows innovation trends within any industry. At first, interest is minimal and the innovation is championed by a small but passionate group. Then more and more people catch on and the innovation grows in popularity. At this point, the hype inevitably runs away from reality before a reassessment and retrenchment finally mean the innovation finds its rightful place in society.
With digital assets, the hype of the last few years seems to have boiled off, with institutions and even governments now looking seriously at how to deal with them. This shows that the industry is ready to move to the mainstream. However the infrastructure underpinning the industry isn’t yet ready to support this move.
Trading of digital assets happens on either a centralized exchange (CEX) or decentralized exchange (DEX). Both have seen major upticks in recent monthly volume, but CEXes still dominate the market despite it generally being acknowledged that a DEX environment is more philosophically in line with the nature and purpose of the asset class.
The benefits of CEXes are clear. They operate at speeds far exceeding most DEX platforms and provide a UX which is familiar for those who use traditional online trading platforms. Operations are similar to traditional exchanges, with similar looking stakeholders, allowing investors the opportunity to experience ‘familiar territory’. However, in a CEX environment, the trust factor is its weakest link. Third parties are required to store crypto assets for users, but this creates a central point of failure or vulnerability that has proven prone to hacks and scams. Losing your assets is an ever present threat.
And there are endless examples of this. In January 2018, $500 million worth of NEM was stolen from Coincheck, the second largest crypto exchange in Japan. Four months later, $40.7 million in Bitcoin was hacked from Binance, one of the largest global exchanges in the world.
By contrast, DEXes create an environment where users do not need to hand over their assets to a third party – vastly reducing the threat of hacking as there is no longer a central point of failure or vulnerability. But they have always lacked the transaction speed, scalability and governance controls that a CEX can offer.
In a standard DEX system, trade settlements are all done on-chain. This vastly slows the process down because transactions all need to be confirmed on the blockchain – unlike in the CEX model which has the exchange to validate them. Similarly, when it comes to governance the CEX model relies on the exchange to act as central authority in settling any disputes, whereas this role is lacking in the DEX model.
Now though, at OAX Foundation we’ve developed a sophisticated code that has the potential to revolutionize digital asset trading. Our code (or Layer 2 Exchange Protocol, to give its technical name) uses some of the very latest innovations in blockchain technology to run a DEX that has the potential to match the qualities of any CEX.
This is because the trade settlement process is all done off-chain, giving it the potential to reach speeds equal to the fastest CEX. And through our code’s on-chain dispute resolution process the governance of the exchange is fully automated. Together, this ensures users get the benefits of a CEX with all the convenience of a DEX.
The industry is confidently heading towards the mainstream, and DEXes must ensure they’re ready to match the benefits that CEX platforms offer while staying true to the nature of the asset class. This is what our new code offers: faster transactions, increased scalability and rebuilt trust through eliminating central points of weakness. With these challenges overcome, DEXes have the potential to move where they belong, to the heart of the industry.
About OAX Foundation
OAX Foundation was created to explore the future of decentralized exchanges and address their four main shortcomings: speed, scalability, interoperability and trust. Digital asset trading is currently dominated by centralized exchanges, which are both counter-intuitive to the nature of blockchain and vulnerable to hacking. Existing decentralized exchanges on the other hand, while tailored to the proposition of digital assets, have performance issues deep rooted in their technology. OAX Foundation’s mission is to tackle these issues and in so doing help bring decentralization to the mainstream.