Who’s It Gonna Be As Loopring And 0x Look To Create A True, Full Decentralized Exchange (DEX)
Between Loopring And 0x, We Might Soon See A Fully Decentralised Exchange
Most of the cryptocurrency exchanges available right now are fully centralized. There currently are a few decentralized ones but most of those seem to have issues relating to scalability. The idea of a fully decentralized exchange (DEX) is that it connects traders (sellers and buyers), enabling their transactions and directly eliminating the need for a third party. Currently, both 0x and Loopring are in the works, trying to create a proper framework for a fully DEX using the Ethereum blockchain. Both 0x and Loopring offer services to traders and institutions for performing decentralized and automated trades but aren’t in themselves, decentralized exchanges.
Established in October 2016, 0x has a simple goal of trying to create a platform such that pretty much anything at all, can be traded on the blockchain. Its currently working on an order book which will be fully decentralized but would resemble the process of that of a centralized exchange.
Also, with 0x, everything is completely organic. Normally, decentralized exchanges use various algorithms which serve to make sure their prices match current prices. However, with 0x, the traditional laws of supply and demand naturally cause normal fluctuations in price. Here, trades will be solely responsible for changes in price.
One of the biggest setbacks with the Ethereum blockchain is its inadequacy. Even though there is a lot of work being done with developers constantly doing everything they can to improve the scalability of the network, there hasn’t been widespread progress yet. While developers hope that the blockchain would eventually be able to support a few thousand different transactions per second, they still are a very long way off as the blockchain can presently only handle 15 transactions per second. This is where zk-SNARKs comes in.
What Is zk-SNARKs?
Zk-SNARKs is a type of shorthand that uses cryptography to validate data and wouldn’t need to reveal any important background details. This is how Loopring hopes to solve the scalability problem and compete fully.
Designed sometime in the ‘80s, zk-SNARKs are a type of zero-knowledge proof which served as a significant part of what we now know as cryptography. It is easily used with cryptocurrency to authenticate a transaction by allowing one party prove that they are well qualified to send funds to another party. This is done while still keeping all the information in the transaction very private.
To solve the problem of the Ethereum blockchain limitations, the DEX would have to combine as many as a few thousand different transactions, lump them together as one, and then submit. Zk-SNARKs can make this process a lot more efficient because it allows the DEX to do it without the need for a large amount of data being deposited on the blockchain. This is an effective solution because if there is no need to deposit a lot of data into the blockchain then a lot more transactions can be processed within a second.
Speaking on this, Daniel Wang, the CEO of Loopring, has disclosed that:
“With zero-knowledge proofs, we can go up to 450 trades per second on the Ethereum mainnet—and compete with small-medium sized centralized exchanges.” He also added that this gives Loopring a chance in the market explaining that “with the previous three versions of Loopring, we were just based on Ethereum. There was no way to compete with centralized exchanges.”
Wang has said that sometime during the coming months, using the zero-knowledge proofs would be made possible.
Since this solution requires that a large chunk of information is not uploaded to the blockchain, there is a need for off-chain verification According to Wang, doing this off-chain verification at the rate at which it needs to be done would entail quite a bit of time and specific equipment. Wang approximated this cost to be at least one cent per transaction but admitted that a more precise calculation could be very difficult because the specific equipment used and the cost of electricity would have to be factored in. However, Wang is hopeful that the estimated cost could be halved.
Even at one cent per transaction, Wang has noted that the price is considerably lower than available prices. While testing, the Loopring team noted that uploading the required information to the blockchain could be as low as 0.1 cent which would directly mean that most of the cost would be taken up by the verification done off-chain. At the end of the day, current costs would still be eight times higher than the cost of the Loopring solution.
To make this process a lot easier, Loopring employs the use of certain operators whose function is to batch these transactions together and then upload them. Operators are generally huge firms or high-net individuals who can let customers of the DEX, trade against them since they hold very huge amounts of crypto. These operators do the uploading and also run the off-chain verifications. However, some people have noted a possible problem with this.
There is a chance that this could cause the operators to become such a stronghold in the network that they begin to represent some form of centralization. Wang has, however, put this worry down, explaining that the highest power an operator can possibly have is to refuse to run transactions especially when they feel that said transactions could be unbeneficial. It has no power to alter a transaction or take funds.
According to Wang:
“We give the flexibility to the operator to drop the requests if they want to. If they do censor trades, people have to not use the DEX. It can’t steal money but it can refuse service.”
Hopefully, between 0x and Loopring, we should see a solution pretty soon.