You have probably heard about Ethereum’s Smart Contracts that has revolutionized the DeFi landscape. The space is currently at $68 billion market cap at the time of writing and it doesn’t seem like the boom is ending any time soon. While the Ethereum platform allows for many advantages to the DeFi space, there still remains various challenges limiting the growth potential.
As mentioned previously, the DeFi space still has enormous potential for growth. So, what exactly is hindering it from growing? One of the biggest hindrances of the Ethereum ecosystem is the limited computational resources. The limited computational resources make it difficult for the platform to scale and upgrade. And that is why even after the various hacks (Bitfinex, Mt.Gox, and more), the user‘s trading experience has yet to be improved. As a direct result of these limitations in trading experience, platforms like AMM (Automated Market Making) have been on the rise to provide a better trading experience and more trading opportunities for users. However, these protocols are only profitable when an arbitrage opportunity is available. So AMMs require Orderbook based exchanges, yet many of the Orderbook based exchanges do not require AMMs to function.
This is where Polkadex comes to play. Polkadex is a scalable and fully decentralized platform that allows for the exchanging of tokens in a peer-to-peer and trustless manner. The platform will allow high-frequency trading, high-liquidity, and lightning fast-transaction speeds to support the various DeFi applications. The team at Polkadex believes that Orderbook based DEXs can still provide fast execution logic, sub second latency, HFT, custom trading bot support, and its very own layer 2 scaling solutio named Offchain State Commits.
Let’s in depth about the architecture of the platform
We briefly talked about some features of Polkadex, but let’s go in deeper. The main focus of Polkadex is to reduce the complexity of the chain. The team believes that only things that need public verifiability need to be on-chain. On Polkadex, Orderbook, Trader Assets Management, Bridge mechanism to Polkadot and Ethereum, and Offchain State Commits are On-Chain. So the trading features which include execution of trade, market data aggregation, technical analysis indicators, storage and retrieval of trade history, and all the remaining exchange features happen off-chain. Moreover this will allow the platform to increase throughput of trades, bring down latency of throughput and make it comparable to the efficiency of centralized exchanges.
Let’s talk trading…
The Polkadex platform in the initial launch will support two types of trades which are Limit and Market orders. The Market-taking orders have a trading fee of 0.2 percent, and market-making orders have zero trading fees. The market makers are incentivized by giving 50% of the collected trading fees in their trades and the remaining 50% to the Polkadex Team. The trading bots are economically impossible in smart contract-based DEXs due to the high gas fees, so the team at Polkadex solves this by using zero network fees and its layer 2 scaling solution. So Polkadex will not collect network fees or transaction fees.
The trading bots can also utilize Market Data RPCs provided by the full nodes to obtain market data for specific blocks. All the technical analysis of the market data can also happen on the trader’s side or even the cloud. This will allow traders to utilize custom trading algorithms and proprietary trading techniques.
The liquidity problem of the Orderbook-based DEXs can be solved by having the layer 2 scaling solution developed by our team. This effectively helps market making similar to centralized exchanges without the complexities of connecting to the blockchain directly. The traders can also provide liquidity to their favorite AMM curves like constant product AMMs. Then these AMMs will reward liquidity providers with a Perpetual Liquidity Mining algorithm adjusted through Governance.
A little more on Offchain State Commits ( Layer 2 scaling solution)
For each block, the nth block receives a Tn snapshot, carrying a signature from the Polkadex cloud management key (a non-custodial operator), verified by off-chain workers that run the same algorithm to check for errors. Suppose the cloud management key is compromised and balances are manipulated for final output, blockchain will reward the off-chain workers for finding any or such bad actors and disallow the transaction to be written to the blockchain. Thus any such compromise is economically pointless.
Since the above layer 2 solution fully resolves the verifiability we expect from an onchain solution for trade execution, this layer 2 solution “State Change Signatures” eliminates the need for liquidity sharing from an AMM Pool for the orderbook. These state signatures are horizontally scalable to accommodate thousands of trade settlements in a single write transaction on the blockchain.
Parachain to Polkadot, Snowfork: The Trustless Bridge…
Polkadex aims to be a Parachain at the earliest opportunity. Polkadex will provide two different ways to provide liquidity onboard. The Polkadot Parachain and a Trustless Ethereum Bridge. So the Polkadex Parachain will help to bridge liquidity to and from Polkadot to Polkadex. The Polkadot Parachain allows traders to bring on liquidity without the need to trust their assets with a centralized service or Polkadex Team. Polkadot’s interoperability layer will secure all of their assets. Learn more about Polkadot and Parachain!
In the runup to the parachain, Polkadex will use Chainsafe to bridge liquidity from Ethereum. Once the Parachain is ready, it will also be using Snowfork as an alternate mechanism for moving tokens from Ethereum. Traders will be able to easily lock their assets on Ethereum using smart contracts and then bridge liquidity to Polkadex. So this will not require any third parties and the assets will lock by the chain making it trustless. With the Polkadot Parachain and Snowfork’s trustless bridge, it will solve the problem of custody of funds in Polkadex. This means that traders will not need to worry about the exchange getting hacked as no-one else has custody of funds.
Check out more about Polkadex!
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