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January 25, 2021

Market Spotlight

The Decred DEX – A Better DEX Design?

Featuring

On Market Spotlight this week, host Nick Gregory was joined by Jake Yocom-Piatt, the cofounder and Project Lead of Decred to discuss the Decred project which promises to be the future of cryptocurrencies and the accompanying decentralized exchanged the mitigates the challenges of existing ones.

What is Decred?

As project lead for Decred, Jake is also the CEO of Company Zero, one of the main contractors building the infrastructure of the project. Decred is an attempt to iterate upon the insights of Bitcoin in a way that evolves continuously over time.
“We’ve been fond of saying lately that Decred is money evolved” Jake retorts.

The goal of Decred is to take this notion of cryptocurrency as it is known as a peg forward from traditional fiat banking and credit systems and to progress that narrative in a way that is secure and solves some of the existing arbitrary issues like people attacking a network by double spending coins.

(01:50) “It’s adaptable in the sense that features can be added and consensus can be changed on the fly, as opposed to, say, Bitcoin where everything is very static” Jake added.

How Decred Started

As the legend of the Decred project goes, back in 2013, a couple of people including Jake started to build a full node Bitcoin implementation from scratch called a “BTC Suite.” The team was impressed with Bitcoin’s core technology and tried to participate with the Bitcoin group but their collaborative expectations did not pan out as they had anticipated. They attempted to bring some diversity into the ecosystem but as they encountered governance problems with Bitcoin’s central planning committee, they decided to discontinue BTC Suite in 2016. It was then that a developer with the pseudonym, “Taco Time” approached Jake with a paper he had written, “Memecoin”, proposing the hybridization of proof of work and proof of stake.

“…you have the proof of work component and the proof of stake component, and they both do separate things, but if you sensibly interleave them, you can get something greater than individual proof of work and individual proof of stake” Jake explained.

With this model, you get really good incentive alignment. It solves a lot of problems where, for example, the incentive alignment with proof of work is pretty weak because miners don’t have to hold coins. They can just dump it all on the market, and then they still have their power in the consensus system.

(04:13) “Taco time” who was also one of the founding developers of Monero in early 2014 collaborated with Jake to pursue the Decred project together as of February 2014 and it went live two years later in February 2016.

Decred is A Better Bitcoin

The core belief of the Decred project is that as great as Bitcoin has been, there need to be systematic improvements to make it better. As one gets deeper into the Bitcoin ecosystem, one starts to see the visible lapses as a result of the static rules of blockchain and that inhibits it from advancing on itself, Jake believes.

(06:11) “Bitcoin was so revolutionary because fiat banking effectively sat and calcified fully to the point where it was very much a rigged game. No one wanted to change it up….Decred is an attempt to evolve Bitcoin” Jake remarked.

Bitcoin, as it exists now, is at the leisure and pleasure of venture capitalists and when they decide they are no longer interested, its long term sustainability is threatened, he explained. Bitcoin is run by a technocracy, some kind of central planning committee, who although smart, create governance that excludes people who hold the cryptocurrency from critical decisions that affect it, Jake added.

(09:00) “You have pretty much zero sovereignty as somebody who holds Bitcoin…In the context of a nation-state, you are effectively a citizen, but you have no say in how that society evolves as a function of time. I feel like that’s not a good long-term configuration,” said Jake.

Why Decred is not as Popular as Other Yield Assets.

The core belief of the Decred project is that as great as Bitcoin has been, there need to be systematic improvements to make it better. As one gets deeper into the Bitcoin ecosystem, one starts to see the visible lapses as a result of the static rules of blockchain and that inhibits it from advancing on itself, Jake believes.

(06:11) “Bitcoin was so revolutionary because fiat banking effectively sat and calcified fully to the point where it was very much a rigged game. No one wanted to change it up….Decred is an attempt to evolve Bitcoin” Jake remarked.

Bitcoin, as it exists now, is at the leisure and pleasure of venture capitalists and when they decide they are no longer interested, its long term sustainability is threatened, he explained. Bitcoin is run by a technocracy, some kind of central planning committee, who although smart, create governance that excludes people who hold the cryptocurrency from critical decisions that affect it, Jake added.

(09:00) “You have pretty much zero sovereignty as somebody who holds Bitcoin…In the context of a nation-state, you are effectively a citizen, but you have no say in how that society evolves as a function of time. I feel like that’s not a good long-term configuration,” said Jake.

Hybridizing Proof of Stake and Proof of Work

(11:51) By combining both ends of proof of work vs proof of stake, Decred uses the latter as a second authentication factor to prevent shenanigans on the proof of work sites. This means that in the case of an incentive breakdown or collision, where people are trying to manipulate a network via proof of work, proof of stake can step in because that action is acting against the interests of coin holders.

Proof of stake itself does come with some issues. For instance, there is a high occurrence of coins leaving exchanges to become Stakers without decentralizing access to other owners. Decred approaches this differently.

Jake: (13:51) If a person is participating in the Decred staking system, their coins are held for a pseudo-random amount of time to prevent people from spending the money that is currently being used for staking which is often the case in delegated proof of stake mostly used by other projects.

The Decred Exchange

Decred is also carving its path concerning how they approach exchanges. For a cryptocurrency, it is uncommon for most projects to build their exchange and yet Decred’s conviction to build its own was based on challenges the project had faced working with other exchanges.

First, it was that exchanges may charge listing fees that can be expensive, up to the hundreds of thousands of dollars. That was unfair as exchange could already make money off of trading fees, Jake noted. The opportunity Decred saw then was to build a non-custodial exchange that allowed different parties to trade without a third party having custody of their coins. Moreso, with its exchange, Decred would not face the problem of delisting for whatever reason a centralized business entity like other exchanges may choose to do.

How Decred Solves Frontrunning

Another big issue exchanges face that Decred’s exchange solves is that of miners reordering tokens to be mine to favour some particular parties. Instances emerge where traders may pay mining farms to front-run other markets enabled by the fact that matching and order book maintenance is done on-chain.

On Decred however, because it’s non-custodial and occurs on a centralized server, matching and ordering are done transparently. So when people commit their values, everyone reveals their commitment value, and then the matching occurs pseudo-randomly. That way, no one within a given period can guarantee that they’re going to execute before other people.

(18:44) “You cannot completely get rid of front running but you can drastically dilute it much harder to pull off. And that’s the way we’ve approached the problem” Jake added.

Decred on Solving High Trading Fee

Decred does have challenges on its own. Like the Bitcoin network, it has encountered cases of higher fees and transactions stuck in the memepool as a result of low fees. Decred seeks to solve this by implementing an automated logic that notifies people whose transactions are delayed because their transaction fees weren’t high enough to bump up their fees to accelerate that process, Jake noted.

On Stablecoins on the Decred Exchange

The Decred exchange may not be seeing stablecoin pairings any time soon. Stablecoins are complicated and creating custody for an asset or working on a synthetic stablecoin like DAI come with complexity tradeoffs that are not favourable to Decred now.

How Decred is Building Liquidity

Decred’s exchange is gradually garnering liquidity from its trading activity and looking to build collaborations to establish a liquidity pool.

(23:46) “In terms of incentivizing liquidity, my goal is to create liquidity between the dex and say, Binance or other major exchanges, and do that to create of a liquidity pool as opposed to having a trading competition on the dex” Jake noted.

Regulations and the Future of Finance

The regulations of FinCen would not affect exchanges like Decred as they’re non-custodial, Jakes noted. The intent of the FinCen around crypto policy regulated may be hugely misrepresented, Jake added.

(26:32) The decision of nations to refrain from banning Bitcoin is allowing the use of peer-to-peer money transfer and that non-custodial component can be repurposed for other use cases.

“We have already repurposed it for proof of stake. We’ve repurposed it now for dex. We’ve also repurposed it for privacy. So this non-custodial network is key to what I view as sort of the future of finance,” he ended.

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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