TXA is Building the Infrastructure to Power Next-Gen Hybrid Centralized / Decentralized Exchanges (Part 2 of 2)
In part one of this two-part article, we took an in-depth look at the problems plaguing centralized and decentralized cryptocurrency exchanges respectively which inspired the creation of the TXA Decentralized Settlement Layer (DSL). In summary, centralized exchanges have counterparty risk, lack of transparency, and have privacy issues. Meanwhile decentralized exchanges are often slow, expensive, have low liquidity, are limited to a single blockchain, and have limited order types. Over at project TXA, we’re simply not willing to compromise on any of these issues, and that’s why we set out to create the TXA DSL to allow for the creation of hybrid centralized/decentralized exchanges which provide the best features of both!
The hDEX is Made Possible by Decoupling Custody and Settlement from the Order Book
TXA makes hybrid DEX / CEX (hDEX) exchanges possible by separating custody and settlement from the order book. The TXA Settlement Layer itself is the decentralized infrastructure that handles custody and settlement, while exchanges build their order books with high-speed matchmaking engines on top. As an open and permissionless system, any exchange is free to build on top of the TXA Settlement Layer. Tacen is the first exchange to build on top of TXA and take advantage of the benefits it offers to both users and exchange operators.
How Does the TXA Decentralized Settlement Layer Work?
Before we start talking about the benefits of decoupled infrastructure, let’s quickly review how the TXA DSL works. The settlement layer is composed of two main elements — TXA smart contract wallets and the Settlement Data Providers (SDP) network. The TXA smart contract wallets are non-custodial wallets on Ethereum or other supported chains where users can deposit assets for use on exchanges and manage the P2P settlement process. The SDP network is a permissionless network of nodes run by TXA token holders. SDP operators collateralize their nodes with TXA tokens in order to deter malicious behavior. SDP nodes are responsible for listening for matched trades broadcast by exchanges, for calculating settlement balances based on all outstanding trades, and for transmitting that information on-chain when a user initiates a settlement transaction.
Users begin trading by locking up collateral in their TXA smart contract wallet and then creating orders based on the value of the collateral in their wallets. Users sign their orders and then submit them to an exchange. The exchange’s matchmaking engine looks for corresponding orders from other traders to match the first trader’s order. When trades are matched, the matched trades are broadcast to the SDP network. The SDP network records all matched trades and optionally writes them to a high-speed decentralized ledger such as ICP or Hedera Hashgraph. Traders may then continue trading based on the value of their locked collateral as long as they like until they decide to settle their balance. All this trading is happening at centralized exchange speeds, and no on-chain transactions are required before settlement. When the user decides to settle their account, they issue a transaction from their smart contract wallet which triggers the SDP network to share information about the outstanding balance on-chain. Based on that information, the settlement is completed. Read more about SDPs here.
Benefits of Decoupled Infrastructure
Lowered Legal Burden
As the TXA DSL handles all the custody and transfer of assets and exchanges themselves are never in custody of user assets, exchanges building on top of TXA do not need to obtain a money transmitter license (MTL) or other related licenses. Obtaining such licenses can be a long, complex, and expensive process that can take months or even years to complete depending on the specifics of the company and country of operation. Besides just lowering the cost, this also allows exchanges to focus on building the best trading experience possible instead of getting bogged down in paperwork.
Privacy and Security
When it comes to privacy and security, the hDEX model just can’t be beaten. Since the exchange is only operating the front end and order book and never takes custody of user assets, there is no need for exchange users to submit bank or KYC information, or even to create an account! And since user assets are kept in their smart contract wallet instead of an exchange-controlled wallet, users never need to worry about counterparty risk or hacks.
By keeping settlement and custody separate from the front end and order book, users can trade with the speed of a CEX while still enjoying the privacy and security of DEX! A key element of the hDEX architecture is the concept of delayed settlement. Delayed settlement means that users may trade as many times as they wish off-chain at high speed, and only submit an on-chain transaction when it’s time to settle their account. Since settlement doesn’t occur for every transaction, traders aren’t limited by the speed of the blockchain where their assets are held.
Meet Tacen, the first Exchange Building on the TXA Decentralized Settlement Layer
Tacen is the first to build a TXA based hDEX type exchange. Tacen will retain all of the benefits of both DEX and CEX exchanges discussed above such as privacy, high speeds, and lower legal barriers. To be explicitly clear, Tacen and TXA are two separate and distinct organizations. TXA offers only its P2P Decentralized Settlement Layer, while Tacen handles the order book and front end. Tacen is the first, but will not be the last. The TXA’s infrastructure was designed to serve as the foundation for any number of crypto exchanges interested in launching an hDEX or converting their current exchange to the hDEX model. Tacen’s launch will make it easy to recognize how the hDEX model allows for exchanges to keep the benefits of both DEXes and CEXes. We expect other exchanges to follow Tacen’s example of building on the TXA DSL after seeing it in action.
This concludes part 2 of 2 of this article series. Make sure to follow us on Twitter to get notified of new content and other announcements!
The TXA Project is a revolutionary initiative to build a global decentralized settlement layer and liquidity pool that is compatible with any typically fast centralized exchange. We call this the TXA Decentralized Settlement Layer, which can be used by any exchange to handle its settlements in a P2P non-custodial manner. The result is a hybrid solution that combines fast centralized exchange order matching with a non-custodial decentralized settlement system, which we call the hybrid-DEX (hDEX).