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In addition to focusing on decentralized trading of futures and spot, Switcheo also launched the Tradehub protocol, making DEX no longer limited by the performance of Layer 1.
Written by: Xiao Mao
In the open finance (DeFi) boom that broke out this year, decentralized exchanges (DEX) are undoubtedly one of the first tracks to be discovered by value. From the data point of view, DEX seizing the CEX market is becoming a real trend. The market share of DEX in the crypto field has been rising, with transaction volume exceeding US$3.8 billion in August, and total transaction volume has continued to hit a record high.
However, due to the current limitations of Layer1 public chain performance, DEX is still under exploration in terms of transaction liquidity and user experience. However, just as traditional financial facilities have experienced the gradual maturity development process, DEX is also exploring and enriching various product structures including derivatives. Lianwen once wrote in the article ” Looking for the Next DeFi Hotspot: Multidimensional Comparison of Decentralized Perpetual Contract Products on DEX Platforms “: The decentralized crypto derivatives market may bring a new upsurge in the DeFi field.
Among the many DEX explorations, Switcheo, the first decentralized exchange in the NEO ecosystem, has launched the new structure of Tradehub Phase 0 on August 12. It plans to launch Demex, a decentralized derivatives exchange based on Tradehub, and open the SWTH generation. The new Staking token pledge model of the coin. As the official team stated, “The main significance of starting Tradehub is to evolve Switcheo from a product with transaction attributes to a product with protocol attributes, so that DEX is no longer limited by the performance of Layer1.”
With the launch of Switcheo’s new decentralized derivatives trading platform, new product architecture, fee models, mortgage and governance mechanisms will also be launched. So, what changes and enlightenment will this bring to the project and the entire DEX industry? It’s time to take a comprehensive look at this DeFi project that aims to explore the integration of “transaction + agreement”.
New understanding of Switcheo from two dimensions
To understand the project, you can start with the two core values that Switcheo aims to capture. The dimensions of these two values are “transaction” and “agreement.”
Trading dimension: “Futures + Spot” decentralized trading platform
Switcheo decentralized exchange was founded in February 2018. It is positioned as a decentralized exchange built on multiple public chains including NEO, Ethereum, EOS, etc., allowing multiple tokens on the three public chains to be on its platform The transaction on the Internet and the exchange of some cross-chain tokens.
Switcheo has released a new version of TradeHub on August 12, and opened TradeHub Phase 0, producing the first genesis block. This also means the first step to open the staking pledge of SWTH tokens in the new economic model of TradeHub, which lays the foundation for the subsequent entry of external nodes and users’ participation in pledge and governance, and gains. At the same time, the trading platform will change from a pure order book model to a trading platform that combines order book and AMM.
Switcheo plans to launch Demex, a decentralized derivatives exchange, in the third quarter. Demex will operate independently from the Switcheo spot exchange and will be developed based on the Switcheo blockchain network architecture Switcheo TradeHub. Demex will also be built on the Tendermint Core consensus protocol Mechanically, it claims to be able to handle peak loads exceeding 1,000 TPS.
Agreement dimension: TradeHub based on dPOS mechanism
TradeHub is an open source dPOS order matching engine based on Tendermint Core launched by Switcheo, which is equivalent to a side chain built specifically for transactions. Switcheo stated that the agreement aims to make transactions, matchmaking, order matching and other links no longer limited to the performance of Layer1, so that Layer1 only undertakes the settlement function.
In addition, the project stated that since Switcheo TradeHub is not a Layer 1 public chain in the true sense, it does not have general smart contract execution functions. Switcheo stated that in terms of security, since TradeHub only allows specific execution paths, the number of attack vectors can be reduced to a minimum, ensuring security on the premise of scalability.
How will Switcheo TradeHub work?
Switcheo Tradehub is a DEX solution using Cosmos SDK as the basic technology. Similar to the mechanism of Cosmos’ PoS network, Switcheo consists of a distributed node network. At the same time, each node of TradeHub will carry a copy of Switcheo’s order matching engine to verify each submitted transaction.
The specific process is that after the transaction is verified and executed on Switcheo TradeHub, the transaction will be broadcasted in batches and settled on public chains including Ethereum and NEO. The order matching engine is based on the existing and verified off-chain order matching engine, which has been running on a centralized server hosted by Switcheo.
Switcheo stated that since it is developed based on the Cosmos SDK, it will be able to directly communicate with other IBC-compliant blockchains through Cosmos’ IBC protocol in the future. The technologies Switcheo plans to use on the network in the future include:
- BTC-WBTC trustless atomic exchange;
- Multi-signature hosting and new cross-chain technology;
- Cross-chain solutions developed by NEO Foundation as a main member;
How does Switcheo’s pledge mechanism and token SWTH capture value?
First, SWTH will simultaneously capture the transaction value of both spot and futures trading platforms. At the same time, with the release of Switcheo TradeHub, the core value of SWTH tokens will revolve around the “Staking” mechanism.
Staking in Switcheo TradeHub refers to using SWTH tokens as collateral to ensure that transactions on the platform are processed in an effective manner. It can be said that this is an attempt to combine Switcheo TradeHub’s entrusted proof-of-stake system (dPOS) mechanism with the decentralized spot and futures trading functions of the Switcheo platform.
Switcheo TradeHub has developed a batch-based matching system to perform low-latency chain matching. Each transaction will be verified by a validator and check the accuracy of the trader’s account signature so that the transaction can be confirmed on the underlying blockchain including Ethereum and NEO.
In this mechanism, SWTH token holders will not actually process the transaction themselves, but by entrusting the token to a validator, the validator will execute the transaction on behalf of the token holder. Currently announced verification nodes include NEO Foundation, NEO Ecofund, IOSG, Zilliqa, NGC, Binance Mining Pool, Huobi Mining Pool, StakewithUs and other institutions and professional node service providers.
At the same time, holders of SWTH tokens participating in the pledge will share the income of the Switcheo trading platform’s handling fees, transaction fees or listing fees. The following is the key information of the SWTH pledge mechanism:
- Responsibilities of Validator: Process confirmation transactions and get rewards
- Number of Validators: It is estimated to support 100 validators
- Staking the rights and interests of tokens: share the transaction fees or listing fees of the Switcheo trading platform
- Pledged token unlocking period: 30 days
- Punishment system: Since the verification node (Valiadtor) can obtain a certain percentage of commission, if the token is entrusted to a malicious verification node, the token of the token holder may be destroyed.
- Reward mechanism: 80% of the transaction fee of the platform will be allocated to the verification node, 20% to the liquidity provider of the AMM transaction, 50% of the block reward to the verification node, and 50% to the liquidity provider of the AMM transaction ；
It is worth noting that the principal can cancel the entrusted token, but the lock-up period for “unbinding” will be 30 days. At the same time, due to the punishment mechanism for malicious verification nodes, token holders need to check the verification history of TradeHub’s block explorer and Switcheo pledge interface, and carefully select verification nodes for delegation.
Since the project will have spot and futures trading platforms, Switcheo and Demex will cover spot and futures trading groups and provide more income for pledges. This mechanism is conducive to encouraging users to become long-term holders of pledged tokens And reduce the external circulation of SWTH tokens.
In addition, SWTH tokens may play a role in the insurance fund system of the Demex trading platform in the future. The Demex trading platform will set up an insurance fund to protect against potential adverse events. The insurance funds will mainly come from funds that are forced to liquidate. However, if the size of the insurance fund exceeds the required funds, SWTH token holders may first benefit from the future profits of the insurance fund.
Through the staking mechanism, SWTH tokens have actually become the platform currency of the trading platform, and token holders will share all potential profits. In view of the launch of Demex, the project will increase transaction volume, both in terms of demand for SWTH tokens and the number of potential token holders.
Monetary policy and distribution of SWTH tokens
When Switcheo TradeHub was launched, the fee model of the trading platform also changed, and SWTH will no longer be destroyed as a transaction fee. At the same time, the Switcheo token economic model has shifted from a deflationary model to an inflation model, but the inflation rate will continue to decline. Switcheo stated that SWTH tokens will expand its total supply from 1 billion to approximately 2.16 billion in the next five years.
According to data released by Switcheo, 4 years after the launch of TradeHub, the number of tokens issued as block rewards will start from the initial weekly release rate of 1.92% in the first week and decrease by 1.65% every week. Tokens will be issued at a fixed interest rate in the fifth year. At the same time, after the fifth year, no new tokens will be issued. The following figure shows the weekly supply curve of SWTH tokens under the inflation period mode:
SWTH weekly mint new tokens
Is there a future for the Switcheo platform that has undergone major changes?
Demex may become a strong competitor on the track of decentralized derivatives exchange
Even if the DeFi field develops rapidly, decentralized derivatives trading is still a relatively new concept. At present, there are few participants in the market that provide DEX for margin and derivatives trading. Switcheo will launch Demex or become a strong competitor in the track.
Demex plans to launch before the third quarter of 2020. The initial version of the exchange will support bearish and bullish futures, perpetual contracts, and will have automatic market making and local liquidity pool functions. In the future, the project plans to add decentralized options trading and more other trading options.
According to Demex’s roadmap, Demex will first support decentralized margin trading, and Demex will support up to 100 times leverage in the future to attract investors who conduct high-leverage margin trading. Current competitors in this area include dYdX and Nuo Exchange, but these two competitors provide up to 5 times and 3 times leverage respectively.
In addition, Demax plans to support a variety of market types, and users can create multiple types of trading markets on the derivatives exchange, including prediction markets, financial derivatives (futures and options). The biggest advantage of Demex is that it can support any type of trading market, which means that the Switcheo team will be able to integrate Synthetix (decentralized synthetic market), Augur (prediction market), Deribit (centralized exchange), etc. over time Features.
TradeHub will bring potential for improvement to multiple attributes of DEX
Switcheo emphasized that the core purpose of the development of TradeHub is to use this technology to remove the bottleneck of the current Layer 1 network performance, expand Switcheo’s future potential, and bring improvements in the trading platform’s functions, transaction mode, settlement process and other aspects. include:
- Order types: Switcheo will be able to support more types of orders through TradeHub, including stop loss orders or profit orders. The project stated that the reason that these orders cannot currently be implemented in the smart contract of the Layer1 blockchain is that the network handling fee is extremely high;
- Cross-chain trading: Switcheo plans to build a complete order book in the cross-chain trading market, and allows the use of limit and stop loss orders for cross-chain trading. Since it is no longer necessary to confirm transactions on multiple blockchains to fully execute transactions, TradeHub has also simplified the cross-chain transaction settlement process;
- Trading mode: Switcheo plans to launch a new trading mode after the launch of TradeHub, open public liquidity pools for all markets and abandon the atomic swap (AtomicSwap) mechanism. The benefits of the new transaction model include two-way payments to different chains when users do not need to conduct cross-chain transactions;
- Liquidity pool incentives: Switcheo TradeHub will provide a public liquidity pool and automatic market maker (AMM) for each market, and support users to contribute tokens to the pool to earn interest;
- Token listing mode: Switcheo TradeHub will support the new function of users’ independent listing of tokens. At the same time, listing tokens only needs to consume a specified number of SWTH tokens and add trading pairs to the liquidity pool 1:1;
At the same time, the Cosmos SDK is developed as a solution for blockchain applications and adopts the dPOS mechanism to ensure the decentralized operation of the project. Since Switcheo TradeHub is developed based on the Cosmos SDK basic technology, the TradeHub cross-chain protocol combined with the underlying architecture determines that the DEX may be able to directly communicate with other blockchains through the Cosmos IBC protocol in the future. “Cross-chain attributes” bring more potential.
Switcheo’s future roadmap and risks
According to data from Coingecko, on August 20, the Switcheo decentralized exchange has supported about 62 trading pairs and more than 50 tokens. The 24-hour trading volume of the trading platform is approximately US$1.3 million, ranking among all DEXs It is the 17th place.
At the same time, according to the product roadmap released by the project, the widely anticipated decentralized derivatives trading Demex will be launched in the fourth quarter of this year. In addition, the product development progress brought by the online TradeHub includes:
- The third quarter of 2020-The recharge of Bitcoin and Ethereum will be opened, and all transactions will be transferred to TadeHub, which also marks the end of the SWTH burning fee model and the official opening of the new network economic model;
- At the end of the third quarter of 2020-open the “liquidity pool” and “automatic token listing” function;
- The end of 2020-integrate NEO 3.0 and Quick Read to support other public chains including Ziliqa, realizing instant response cross-chain transaction function;
The risk worth noting is that our current expectations for products are based on the continuous development of the decentralized derivatives trading market, and the development of cross-chain technologies such as Cosmos IBC is progressing smoothly. If the IBC cross-chain protocol and derivatives trading The slower market development may bring Switcheo the risk of not developing as expected.