As Cardano comes online, several critical components are needed to become a full-service financial operating system. Chief among them is a robust DEX, or decentralized exchange. Naturally, the need for this crucial piece of infrastructure is widely recognized, and competition is already heating up.
Those in the know are familiar with SundaeSwap and its Lead Developer, Pi Lanningham. Pi recently appeared on the Cardano Live Podcast and presented a concise vision of the startup’s roadmap. In brief, the DEX aims to facilitate the exchange of assets using asset pools that incentivize users to provide liquidity. The exchange manages swaps using an automated market-making (AMM) algorithm, a nascent innovation of the cryptocurrency space. The protocol is distinct from order books, a price-arranged list of buy and sell orders used by traditional exchanges for trade.
That said, another brand familiar to the Cardano ecosystem is working to deliver a different solution. Ergo is an eUTXO, proof-of-work blockchain supported by many in the Cardano ecosystem. Charles Hoskinson has spoken highly of Ergo founder and former IOHK research fellow Alex Chepurnoy and even called Ergo the “spiritual successor to Bitcoin.” Recently, the technologist is helping manage applications like ErgoDex and its contributors Ilya Oskin and Dmitry Usov. Overall, ErgoDEX aims to develop a decentralized trading platform incorporating a combined AMM and order book model that will function on Ergo and Cardano.
Money Services and the Need for DEXs
Centralized exchanges and money services are an integral part of traditional finance and the burgeoning cryptocurrency space. For instance, PayPal began providing crypto services during the 2020 run-up, and platforms like Coinbase routinely announce spectacular profits. If nothing else, these developments bear witness to the high degree of excitement surrounding the industry.
However, unlike DEXs, these entities exist in “meatspace” and are subject to various jurisdictions. This results in clear issues for many market participants, not least of which are invasive know-your-customer (KYC) policies. Several alleged hacks of exchanges and payment infrastructure have reportedly involved this sensitive personal information. In 2019, CoinDesk was able to confirm that customers’ KYC information was leaked from Binance. Worse still, a massive hack of Ledger, a hardware wallet provider, resulted in over 270,000 customers’ information including full names and addresses being spread across the dark web.
Freedom from Manipulation
Arguably the most publicized incident in finance over the last year occurred when Robinhood was forced to suspend trading of GameStop stock. In January 2021, a working-class investor-led short squeeze, notably organized on the r/WallStreetBets subreddit, caused the price of the equity to skyrocket 30x over the month. Robinhood forced users to sell shares, claiming a sudden surge in their regulatory capital requirements.
DEXs like Uniswap and others offer a solution to such vulnerabilities and opaque operations. Currently, these platforms allow market participants to trade digital assets without submitting to stringent KYC. Furthermore, the decentralized nature means no central entity can halt trading. A dramatic 2021 May selloff saw bitcoin and others drop nearly 50% from all-time-highs over several weeks. While this figure is shocking, Uniswap and the larger DeFi space operated relatively smoothly despite the intense volatility. As financial influencer Raoul Pal tweeted, decentralized protocols remained liquid, no forced selling occurred, no central bank action was required, and no market limit breakers prevented trading.
The Ergo DEX
DEXs are part of the theme of decentralization, a pillar of the cryptocurrency space. As such, it’s unsurprising that support for DEX projects seems strong among the Cardano community.
According to the ErgoDEX GitHub, ErgoDEX is “a set of protocols and an ecosystem built on top” which allows users to trade any pair of tokens through a single interface. Furthermore, the eUTXO model of Cardano and Ergo facilitates the combination of AMM and order book style contracts. This functionality allows exchanges on top of the two blockchains to share liquidity while providing the services users expect.
Under the hood, the ErgoDEX is primarily composed of DEX operators and liquidity providers. Operators run DEX bots and implement UIs that match swaps. Liquidity providers allocate assets in assets pools used for trading.
Naturally, these infrastructure providers are incentivized. Entities participating in DEX operations benefit by providing the best trading experience possible and driving user engagement. Doing so earns them fees from both order book- and AMM-based swaps. Similarly, liquidity providers make fees from the liquidity pools in which they participate.
The current state of ErgoDEX is described in the EIP14 improvement plan GitHub page. While ErgoDEX will become the standard DEX protocol for Ergo, its eUTXO allows its functionality to be ported to the Cardano ecosystem. In concrete terms, the platform will support cross-chain swaps between the two blockchains.
Moreover, many contracts from ErgoDEX protocol have already been tested in the ERGO mainnet, and others can naturally be tested on the Ergo blockchain. Plutus, IOHK, Ergo, and Emurgo developers have already accomplished this. Previously, the AgeUSD stablecoin was converted to Plutus, the smart contract programming language of Cardano. These smart contracts are currently being implemented on Cardano.
Together, they are asking for $91,000 in funding. With this, they will:
- Develop UIs for the AMM and order book functions
- Run public tests on the Ergo blockchain
- Port the tested protocol to Plutus
- Update backend services such as DEX bots
- Format the DEX UI to work with both Cardano and Ergo
- Test and launch the app on Cardano
The team will allocate the funding as follows:
- 3-month, full-time salary for two UI devs: $30,000
- ErgoDEX UI/UX: $10,000
- 2-month QA: $6,000
- 2-month, full-time salary for two core devs: $30,000
- 3-month salary for one Product Owner: $15,000
- Inter-chain swaps protocol R&D: remaining funds
If you’d like to know more information or have questions/comments regarding the ErgoDEX Plutus Port, check out the link provided: https://cardano.ideascale.com/a/dtd/ErgoDex-Plutus-Port/352410-48088