Topic: Quality of service in decentralized exchanges (Read 25 times)

Most of us here have probably exchanged crypto one way or another. Even if you bought someone's services directly via crypto transaction, you essentially traded in some of your tokens for something else. That counts as an exchange.

If we take it up a notch though, part of the utility of crypto comes from the fact that it's very versatile in being a tool to conduct financial transactions with. Of course we can't expect everyone to accept cryptocurrency payments for services so those holding crypto will often seek to conduct currency exchange. A very popular and direct method to do that historically has been peer to peer in person trades. Cash to crypto and crypto to cash. This method still remains perhaps the most trustless and seamless methods to acquire another form of currency using crypto.

Climbing MtGox
Bringing cryptocurrency trades to the digital world was an inevitability. Bitcoin being created as a digital version of cash, it was only a matter of time after people saw value to it to start trading it through digital means. Not (that) long after its creation we saw plenty of centralized exchanges offering to settle trades with BTC and USD.

Centralization in the exchange of cryptocurrency has every advantage but also disadvantage a centralized clearing house can have. It can be fast, seamless and cheap to trade currency in this way. However, in order to do that one must trust the exchange where the trades are happening on. Suddenly, the counterparty is no longer the person you're matched to trade with, but rather the exchange itself being unable to fulfill it's obligations. The rest is history, and it repeats itself. From MtGox's collapse 10 years ago to FTX people don't seem to have learned much.

The alternative
When Vitalik Buterin proposed the Automated Market Maker model for exchanging cryptocurrency, finally a more decentralized and trustless way to conduct crypto to crypto trades started being on the table. However the issues that were later realized upon implementing this technology were quite interesting. For one, Ethereum's chain capacity for transactions was nearly maxed and therefore fees to conduct decentralized exchange transactions are prohibitive for most transactions now. Moreover, new risks were introduced where a node runner would snoop other people's transactions and "sandwich" its own transactions before and after a trade happens, to force the buyer to sell/buy at a price beneficial only to the node runner, therefore squeezing an unnecessary price premium out of the trader.

Unsurprising answers to new issues
Interestingly, more and more so called "decentralized" blockchains have been coming forward, promoting their own solutions for supposedly decentralized trades. The issues of slow, expensive or vulnerable transactions based on Ethereum's infrastructure have been carried over however. So what has the innovation been out of all these new "blockchain" projects? For instance, with Binance's Smart Chain (BSC) we have been seeing an upstream fork of Ethereum that is in fact permissioned. Only a couple dozen nodes are allowed to operate and verify transactions on the chain. In reality this allows transactions to be fast, and even to some extent protected from malicious attacks such as the previously described "sandwich" attack. This is possible since these nodes don't have to run on a protocol of full transparency, and are only obliged to broadcast transactions only after they've verified them instead of broadcasting their entire mempool.

With all these added advantages however, also comes more centralization and trust-based relationships for conducting transactions. You have to trust the organization conducting downstream development, in this instance being Binance, the node runners, the infrastructure and infrastructure providers of the node runners etc. Things become prone to central failure and we can even see an entire "blockchain" shut down completely like we saw with Solana.

The trilema?
You've probably heard the so called scalability trilema in crypto by now. Basically stating that you can have a combination of two of either scalability, security and decentralization. Looking over at the solutions we have at our disposal for trading cryptocurrency one could say that this issue also applies to decentralized exchanges and/or the infrastructure they're built on. If Ethereum is to be taken as a prime example of decentralization for a blockchain ready to host decentralized exchanges, it's already lagging far behind how decentralized bitcoin is.

So the question we need to ponder upon really is why and how have we failed to provide a decentralized solution for trading crypto. Years ago there was a lot of talk about atomic swaps. Are EVM based DEXs the best we have so far though? Have we reached our capacity for how a decentralized and trustless cryptocrrency exchange eliminating counterpart risk can be? Ideally we should look if existing solutions be improved while also maintaining or improving ease of use and access. Because let's admit it, current solutions like DEXs while functional are lacking in all 3 sections of the so called trilema.