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0x Protocol, Waves, and EtherDelta: Solutions and Limitations of Distrust

By: Kush Patel
Chief Technical Officer

This week we would like to showcase a series of guest posts from fellow Co-Founder and resident CTO here at BlockX Labs.

Part I of this Guest Series included an in-depth explanation of the Maker and Taker concept and the distrust that happens in Decentralized exchanges. In this second installment, we will explore available solutions and limitations of distrust by 0x protocol, Waves, and EtherDelta.

What are 0x protocol, EtherDelta, and Waves?

Firstly, all three represent examples of Decentralized Exchanges. For those that are unfamiliar, 0x protocol and EtherDelta are decentralized exchanges that allow users to trade different types of Ethereum-based tokens directly.

Waves is a blockchain platform used to create custom application tokens (aka CATs), but also serves as a decentralized exchange in which users can trade newly created coin in a trading pair with any other Waves token.

Although these examples are normally presented as decentralized, many of them do not actually meet the thresholds of ‘true decentralization’. Normally, 0x protocols are typically kept on a centralized book, while settlement is on a decentralized ledger.

How do 0x and EtherDelta Work?

In the first article of this series, we explained the concept of Makers and Takers. Most decentralized exchanges such as 0x protocol, EtherDelta have a lifecycle like the image below:

In this example, Mary Maker sends the order, which then enters on the exchange running on 0x APIs. The order then resides in a central book hosted by each exchange. The order then shows up on a screen to be taken by Terry Taker and filled.

One of the only pieces in this model that is decentralized is the Execution of the Smart Contract on both sides. In this instance, the settlement happens right on a distributed ledger (in this case it would be Ethereum). The order is then completed by Buyer and Seller account directly. This is the decentralized settlement.

In EtherDelta, the order is similar to 0x with a few exceptions. The Order is firstly submitted to decentralized Contract. Terry Taker sees the order by reading the Contract and selects an order to fill. Trades are settled directly between Mary and Terry by their accounts. The central book is decentralized as is settlement.

What the Advantages of these Decentralized Exchanges?

Not everything is doom and gloom for decentralized exchanges. Anybody can trade, there is no central exchange, and settlement occurs directly between the participants themselves. According to Iddo Bentov, et al., having a single Decentralized Exchange hold the assets for all point-to-point and broadcast orders and allowing multiple Relayers will likely lead to a more liquid market. They further believe that competition among Relayers may lower the fees that user pay.

EtherDelta has the added benefit of reputation as it was created by well-respected Ethereum developers. The settlement is decentralized, and liquidity in this exchange is central.

What are some disadvantages?

Iddo Bentov and co’s article expertly outlines some of the disadvantages and flaws of decentralized exchanges some of which include: exposure to arbitrage, vulnerability to miner frontrunning, exposure to exchange abuses, etc. Their article on the subject is highly recommended.

We would like to add that in both 0x and EtherDelta, the Central book still exists in each exchange. The overall liquidity is thus diluted across the exchanges as well.

According to Coincentral, to prevent scaling issues, the Waves platform uses a two-tier architecture with both lightweight and full nodes maintaining the network. Waves has an orderbook like the EtherDelta and 0x. In order to post an order, access to the Waves nodes are required while Matcher nodes are responsible for pairing orders and executing trades quickly, whilst they are still settled on the blockchain

Disadvantages: The Central book still exists in each of the exchange. Furthermore, in both exchanges, the Overall liquidity is diluted. Both also only accept Ethereum, which vastly decreases the access to other cryptocurrency.

Conclusion

Although there are downsides to centralized exchanges, it is important to recognize the limitations each exchange provides. There are a lot of unanswered questions concerning governance, and the negative implications regarding the current limitations. Decentralized exchanges such as 0x, EtherDelta, and Waves, have made an impact in the blockchain space, but ensuring adequate performance, access to other currencies and ensuring security, is still yet to be seen.

Do you think there are better Decentralized Exchanges than 0x, EtherDelta and Waves? Let us know in the comments below!

Kush Patel has been a consultant for some of Canada’s top banks. His experience spans from developing financial products to scaling complex technical architectures. Kush has also built and maintained Exchanges which transferred approximately $1bn worth of assets on a daily basis. Nowadays, he is focused on working with our clients to build developer tools, DEXs, and innovative blockchain products.

BlockX Labs specializes in building developer tools and solutions for blockchain ecosystems.We aim to sift through the noise to bring some sense and clarity into the Blockchain space. Our accomplishments include AIWA — a wallet and DApp interaction tool for the Aion Network, and Universal Faucet — a test token faucet for Ethereum, Aion, and Tron.

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