Decentralized Exchanges : Explaining Makers, Takers, and the missing piece

By: Kush PatelCo-Founder & Solutions Architect

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

Part I of this Guest Series includes an in-depth explanation of the Maker and Taker concept and the distrust that happens in Decentralized exchanges. Part II will cover part of the blog we will explore available solutions and limitations of distrust problem by 0x protocol, wave, and Etherdelta.

What do you mean by the ‘Makers’ and ‘Takers’ concept?

To explain the makers and takers concept I will enlist the help of Mary Maker and Terry Taker for the following scenario:

Mary wants to buy (or sell) BXL token (Blockx Labs token). Mary creates a BXL Order. It is important to note that it doesn’t actually matter if Mary buys or sells. Just that the transaction is created.In this scenario a Liquidity creator is a “Maker” and a liquidity reducer is the “Taker” in the exchange. For all intents and purposes, this makes Mary a “Maker” for the Exchange.

Terry was reading important announcements about BlockX Labs. He sees Mary’s order on the Exchange and is interested in completing the order. Terry accepts Mary’s order and becomes the Taker for the exchange.

How does this differ from a Centralized Exchange?

In the example above, Mary created an example which was absorbed by Central Software. If any user wishes to trade, they would have to talk to this Central Software. The Central Software is what makes the exchange centralized. While blockchain is running on tens of thousands of nodes, a central server runs on much fewer nodes, possibly only one server.

The Central Server is generally owned by one person or single entity. Such and entity can be scrutinized heavily and forced to censorship. This Central entity could also be target of attack by a malicious group of people or even a country quite easily. This is why decentralized exchanges provides universal participation and freedom from censorship.

Exploring a Decentralized flow

A decentralized flow is more about how the order is submitted to every user, not just a central book. Every user receives the order and every user has a chance to accept it once an order is placed. If the order is accepted, the order is thus fulfilled by both parties.

In this example, Mary would create an order which is published to Terry and all other participants like Terry directly. In this scenario, ever user is running the Central book. When Terry accepts the order, it happens directly on the blockchain. Mary and Terry, as participants, are able to complete the trade without the need for a Central Book.

In a decentralized flow, every user is running the Central Book. Mary publishes to Terry and all other participants Central Book directly. When Terry accepts the order. the settlement of the transaction happens on blockchain directly. All participants completes the trade without the need for a Centralized book or software. When the order is complete, this is added to a new block on the chain.

Example of a Flaw in Decentralized Flow

To explore some challenges with decentralized flows, let’s take a look at the scenario below:

Mary decides to sell BLX and Terry accepts. Terry sends the required Ether to Mary but Mary maliciously refuses to send BLX in exchange.

In this instance, Mary is removing trust from the transaction, which also leaves the settlement of the transaction unfinished. This is the missing piece of decentralized exchange which hasn’t been fully addressed. How is trust guaranteed between two participants? What sort of protections need to be in place to protect the interests of all participants?

Conclusion

Trust is the missing piece that has not been fully addressed in decentralized exchanges. Makers and Takers as participants thus reach a standstill. Currently, decentralized exchanges lack adequate protections to ensure each “Maker” and “Taker” is protected at all levels of a transaction. While centralized exchange provides trust, it is limited by censorship and may become a target for hackers target. A core issue of decentralized exchanges is the problem of trustless participants to solve.

Do you have any questions regarding Decentralized Exchanges? 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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