Trading and SDP Operation under the hDEX Exchange Model
The TXA Ecosystem Project is creating a unique exchange model that combines the positive features of DEXs and CEXs. The infusion of these two models led to the Hybrid-Decentralized Exchange (hDEX), which offers trades the avenue to buy and sell at blazing speeds while retaining the secure non-custodial advantages of DEXs.
The hDEX model revolutionizes the exchange industry for buyers and sellers because it embraces the Nakamoto ideals of decentralized exchanges. In addition, this model changes the narrative in the market by offering reasonable expectations of privacy for privacy-oriented traders and guaranteeing efficient trading speeds. Interestingly, the architecture is designed such that it can support more than one exchange platform running on the hDEX architecture.
However, for all the benefits this model seeks to offer, a trader must understand how the trading process works. The trading process starts with two or more traders collateralizing the funds they intend to trade in their non-custodial Smart Wallets. Your non-custodial Smart Wallet allows you to hold and retain your private key without losing autonomy over your funds. The collateralized amount represents the trade limit of those involved. Trading will be carried out through signed orders that are forwarded to an exchange platform’s order book.
The process is followed by order matching to identify compatible trades and pair the right buyers and sellers for orderly, fair trading. The hDEX architecture allows for and encourages the use of centralized high performance matching engines, which can easily match trades faster than 1ms because there is no blockchain impeding it. The matched orders are then broadcast to the TXA Decentralized Settlement Layer, which consists of Settlement Data Providers(SDPs), which are controlled and operated by third parties, such as the community. These SDPs witness and record every matched trade for the future “coordinated settlement process”, where their goal is to be selected and in turn provide this settlement data for a fee.
The “coordinated settlement process” is a process that is initiated by any individual trader by issuing a smart contract call to their Smart Wallet. This starts a process wherein SDPs are randomly selected to form a quorum to manage that particular settlement, which pulls in all traders that have transacted with the initiating party. Once the quorum of SDPs are selected, they provide the condensed obligation data, which is the net obligation, or delta between each pair of traders. The Smart Wallets ensure that a 2/3 consensus by SDPs is reached on the settlement data and then the individual trader’s smart wallets use that data to settle debts amongst themselves in a P2P fashion. In return for providing this crucial settlement data, SDPs can charge a data fee, which is usually denoted as a percentage of the total transaction amount in the settlement.
What’s interesting to note is that the SDP incentive structure is very similar to how mining works in blockchain. In a typical blockchain, nodes will compete to collect valid transactions and form blocks, successful inclusion of a block in the blockchain allows that node to collect the gas fees incorporated into that block. In a PoS-based blockchain, there is usually a staking requirement and/or other requirements that must be met to participate as a node in the blockchain network. In much the same way, SDPs in an hDEX will collect valid matched trades in hopes that if they are randomly selected for a settlement, they have an opportunity to process the trade data and provide the settlement data in return for earning a fee. Staking is similar in the TXA Ecosystem, SDPs must stake a certain amount of TXA as well as pass other checks to participate in the network. Since the total aggregate fees available to be earned is a function of the total volume flowing through the hDEX, we imagine that it will be very competitive to operate an SDP as the user base grows. Of course, this entire TXA Ecosystem will have to be governed and token holders will definitely have a say. We are excited to share more info on this in the future.
The importance of the delayed settlement cannot be downplayed. It represents the period when the TXA ecosystem is able to run at centralized exchange speeds without compromising the transparency and security parts of DEXs. This is the leverage that comes with the TXA ecosystem.
Here’s a good example. Suppose John and Peter trade 30 times and, after the trading, Peter owes John $200. SDPs will report the outstanding amount to the Smart Wallets so that Peter can settle the obligation via a P2P channel. This will trigger the release of his funds from his wallet.
The ecosystem TXA is building thoroughly democratizes the trading system by creating different players with adequate incentives. SDPs engaging in settlements can charge up to 0.5% as their fees (tentatively, but this may be changed through governance actions). Depending on trading volume, millions of dollars could potentially go to the SDP network annually, and it’s shared across all providers. The selection process is random, meaning that generally all providers at a certain reputation level have equal chances of being selected. Notably, providers will build a reputation over time based on the number of settlements they’ve been involved in and the amount of collateral they have allocated.
With the ecosystem TXA is building, there will be shared value across the key players. For example, in Q1 2021, Coinbase earned 1.8 billion. Suppose even half of this went into the TXA Ecosystem, the generated amount will receive more democratization across various players. This is what TXA works towards.
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