Journey to ASGARDEX — perfectly liquid decentralized exchange

2018-11-06 — 6 min read

ASGARDEX will be the first decentralized exchange (DEXs) to be built on the THORChain protocol. As an interface to the THORChain infrastructure, ASGARDEX will break feature-parity with thebest practices of centralized exchanges, while at the same time as being more secure, reliable and powerful than any existing digital exchange.

This document will outline the key features of ASGARDEX including;

Incentivized On-chain Liquidity
Advanced Trading & Payments
Multi-chain and Multi-token support
Permissionless Access

Beyond outlining the key features of ASGARDEX we will explore some of the mechanics of the THORChain protocol to incentivize liquidity and high-performance transaction speeds.

The current problem with DEXs

Current decentralized solutions are complicated to use, have low liquidity and as a result transactions times are incredibly slow. In short, the current user experience of DEXs is unacceptably inefficient to compete with centralized exchanges.

Until decentralized exchanges can compete on liquidity, they will never gain enough traction to be able to compete with centralized exchanges on the provision of enhanced security and privacy.

THORChain, and by extension ASGARDEX has been created to address the single biggest issue within crypto; how can we make claims on decentralization, when the exchanges themselves are still entirely centralized?

The short answer is, we can’t.

The current landscape is idyllic in concept but naive in execution. Many of the previous draconian financial practices have smoothly transferred over to this ‘new financial paradigm’ and most crypto users are none the wiser. The most obvious of these measures include unilateral fee structures, centralized control of data and assets with single-points of failure, and limitations of asset liquidation (maximum of 2BTC withdrawals a day etc).

Crypto at its most fundamental is supposed to be about borderless, frictionless transaction of money, without state-level intervention. A global financial movement driven by peer to peer transactions that is insulated from rent-seeking middlemen. However as most astute crypto people are aware, crypto is littered with prying hands and absurd transaction fees, the literal definition of what crypto was supposed to avoid.

Old habits, die hard.

That is unless we are no longer willing to allow them to.

The race to feature parity

It is not enough for Web3.0 solutions to merely match existing technology, they must exceed them. That is, the user experience must be more intuitive, with fewer barriers to entry, while maintaining the self-sovereign decree.

The first step to achieving this is reaching feature-parity with existing solutions.

In THORChain’s context that is to make sure that at a minimum ASGARDEX achieves the functionality and liquidity provided by current top10 exchanges, while enhancing security by the distribution of assets and data that deters attacks on the network before they happen.

Incentivized On-Chain Liquidity

THORChain encourages users to stake their assets in on-chain continuous liquidity pools that add to market liquidity and earn their holders a return in tokens as an incentive for supporting the network.

Continuous Liquidity Pools (CLPs) are an innovation developed by the THORChain team to allow access to liquidity without needing to find a buyer or seller on an exchange. CLPs are actually an adaption of the smart tokens that Bancor use in their liquidity network, with one important distinction; liquidity in the pools can be placed there by anyone, and earns them a return at the same time. Thus liquidity becomes permissionless and incentivized.

ASGARDEX, as the interface to the THORChain protocol, rewards the same inventive mechanisms to ensure that the global order book is always liquid.

Advanced Trading & Payments

ASGARDEX allows for more sophisticated trading options beyond market orders such as leveraged margin trading, and futures trading.

Leveraged margin trading crypto-currencies involves putting up collateral and receiving assets on a multiple (leverage) that can be traded. As an example, if a trader puts up 1 Bitcoin to trade at 100X leverage, they are lent 100 Bitcoin. If the borrowed asset incurs a loss, the collateral is automatically liquidated to cover the borrower, at the correct ratio.

THORChain’s CLPs permit shorting of any asset by combining the Lending & Liquidation features above, in addition to the functionality of the CLPs. Further, they can also allow shorts to be priced in any currency of value to the trader, not just $USD or BTC. For example, a trader may short TokenD against TokenB. In this case, they borrow TokenD and sell it for TokenB. If TokenD reduces, they can buy it back with their TokenB holdings and pay out their debt.

Traders can also perform leveraged shorts by trading with a leverage ratio. In this case their gains (or losses) are amplified, but borrowings can be liquidated as required to prevent a loss to the lender.

Multi-Chain Support

THORChain will implement the Bifröst Protocol to allow support of all tradable assets, no matter the originating chain.

This allows assets to be moved seamlessly on and off the THORChain environment and allows tokens to be transferred from blockchain to blockchain by making use of bridges between chains.

Bridges to THORChain are supervised by THORChain validators in multi-signature accounts, each bridge maintains optimal performance whilst being supervised with full protocol consensus & security.

This is possible and superior to existing models because of the integrated use of CLPs and Bancor.

Permissionless Access

THORChain is a protocol that simply allows for the transfer and trading of assets, it does not enforce any level of account management, control or censorship. This means that all responsibilities are permissionless, and governed by the THORChain validators to stamp out negative activity.

FIX 4.4 is the Foreign Information Exchange protocol built for trading desks to place trades such as indications, orders, and executions in a standardized and efficient way across a network. It has been adopted as the standard electronic trading protocol and THORChain intends to build for FIX 4.4 compatibility to allow liquidity and access to institutional traders and investors.

THORChain also believes in the right to privacy and financial anonymity and with this can implement the ZeroCoin protocol that can respawn accounts and work as mixins for those familiar with popular privacy coin Monero. ZeroCoin can be thought of as an inbuilt anonymizer where you don’t have to trust any third parties. The link between the old coin and its associated transaction history is broken for auditing purposes.

Conclusion

ASGARDEX represents a new frontier of exchanges, with permissionless access, on-chain incentivized liquidity, and advanced trading features. THORChain, the protocol that it is built on, will power the next generation of exchanges, wallets and payment networks.