Part 2: The Ideal Exchange — Key Features (and Why They Are Essential)
TLDR: The ideal exchange is- cheap, fast, fair, safe, and convenient. Because they are public goods, exchanges should be prioritizing community service over profits. Vertex aims to meet these ideals.
In our call to arms we identified the monopolistic nature of CEXs and their adverse effects on the current market, discussing exchanges and their purpose. This week we go on to explore something better, an ‘ideal exchange’, and why it matters.
Our mission is to make decentralized trading easy, efficient and useful for everyone. Pursuing that mission involves de-monopolizing exchanges and bringing the benefits of DeFi to users. The exchange should be:
- Cheap — Not just lower transaction fees, but also capital efficiency and minimized friction. This allows traders to optimize pricing and execution.
- Fast — Compromises on speed lead to bad outcomes as trading, liquidations and liquidity struggle to keep up with fast markets.
- Fair — A level playing field allows the best players to rise on merit, improving trading for everyone.
- Safe — Self-custody to give users full control over funds.
- Convenient — Functionality, user experience, familiarity must all be priorities, not an after-thought. DEX convenience should match or exceed CEX convenience.
Delivering value for our community members in these areas will allow us to outcompete others working in the space. They also help us to make the following design choices:
Orderbook — An orderbook lists all bids and offers available on an exchange to show prices and liquidity at various points in the market. This information is valuable to traders as it reflects the market propensity to buy or sell at any given time. Behind the orderbook is a matching engine where bids and offers with the same price are ‘matched’ and clear through into our risk engine.
Vertex’s orderbook runs on a highly optimized EVM node where traders can show bid/offers and trade in the most efficient way possible.This model allows for a number of benefits:
- High Throughput
- Low Latency
- Gasless order placement
- Zero MEV — Validators cannot aid front-running
- All of this whilst leveraging the safety and security of EVM via Arbitrum.
Integrated AMMs — On top of a highly performant orderbook, AMMs further strengthen the ecosystem:
- Providing liquidity to trade even if orderbook is unavailable
- Supporting liquidity in illiquid underlyings allowing for breadth of markets
- Democratizing market making for less technical participants
By merging AMM and orderbook functionalities, users receive the best of both CEX and DEX and a wider variety of participants are able to help drive ecosystem growth.
Fully integrated trading stack — A complete trading system for crypto should integrate:
- Money Markets
- Arbitrage which helps keep prices tightly aligned
- Cross Margining so that participants can trade assets efficiently
- Abstracted trading strategies so that users can implement sophisticated strategies like basis trades, interest rate arbitrage, and looping (leveraged yield farming) strategies with ease
- Robust risk management conducted on-chain to protect users from improper conduct
Integrating of the trading stack is key to competing with today’s CEXs. Current dApps provide only individual pieces of the trading stack (i.e. only spot or only lending and borrowing) and so create friction for users. Integration aids all users by making trading convenient and cheap, generating more value for all market participants. CEXs tend to do this very well (thanks to centralization), so our ideal exchange must be able to do this too.
Optimized deposit and withdrawal — Depositing and withdrawing funds is a major convenience offered by CEXs. It splits into two parts:
- On/Off-ramps help facilitate bringing value from Fiat to Crypto and vice versa
- Bridging helps move value between various segregated crypto ecosystems and blockchains
Users should never have to endure complex and stressful processes to get their funds to a desired destination. The integration of bridging and ramp options helps make this a simple and convenient process.
As a caveat, funds on CEXs are in custody of a centralized entity, which means users rely on the exchange to operate honestly with their money. DEXs are non-custodial, which means users have authority over their assets and that all funds are secured by private keys that only they control. Self-custody is a leap forward in security for all users and minimizes the issues associated with bad actors and trapped funds.
These smart contract and backend features are either accessed through a frontend or an API. As such, our ideal exchange must optimize for accessing this performant backend infrastructure. Getting UI/UX right for an exchange requires addressing these areas:
- Wallets — DeFi’s self-custodial nature has made wallets the standard for storing and tracking one’s assets. Unfortunately, most wallets are unfamiliar and intimidating to the majority of Web2 users who prefer the simple email or social media sign-in they get everywhere else. Our ideal exchange will accommodate these preferences without compromising self-custody.
- Multiple trading interfaces to address user needs — Beginners and buy-and-hold users might appreciate a simplified and ‘clean’ UI. Professional traders might require something which displays much more data. Our ideal exchange must cater to all users’ trading preferences with a selection of frontends which the user can choose from.
- API and SDK tooling — Automated traders generally contribute the most liquidity to markets, so making their process easier via API and SDK solutions is a must. Our ideal exchange should have software solutions which integrate well with existing trading systems and the rest of the DeFi ecosystem.
Finally, the ideal exchange is flexible and adapts to the needs of the communityit services, serving people first and making profit second.
The reality is today’s exchanges do not service the best interests of their users. CEXs lack self-custody and transparency exposing them to security and reliability issues. Often they fail in moments of highest uncertainty, exactly when they are most needed.
Decentralization is the obvious remedy to these issues, but today’s DEXs have limited functionality and throughput, reducing their convenience. UX is unfamiliar and even intimidating to new users, so those who would most benefit from DeFi are pushed back to the comfort of CEXs.
Vertex Protocol believes in something better: an Ideal Exchange. This ideal will have many features: an integrated trading stack, performant infrastructure, user focused wallet and bridging. Everything is built with the user in mind.
In the next post we will look at how the distribution of governance via decentralization can align incentives and help further our pursuit of the ideal exchange.
Read Part 3 of the CEX vs. DEX series here.