Decentralized Centralized Exchanges (DCX): A New Paradigm for Crypto Trading

## Abstract This whitepaper introduces the concept of a Decentralized Centralized Exchange (DCX), also known as the "Daisy Chain Exchange". The DCX model leverages recent advancements in DeFi, particularly in the realms of identity, account abstraction, and token-bound accounts (ERC-6551), to create a more secure, efficient, and competitive trading environment. The DCX model is built upon three main components: trading accounts, trading execution, and lenders. Trading accounts in the DCX model are on-chain, with the option for self-custody. Trading execution is handled by solvers, RFQs, and CEX operators, ensuring that trades are executed in the most efficient manner possible. Lenders issue debt to each account, finding bids in the event of insolvency. This system also presents potential challenges, such as skewed incentives when lenders are also the ones determining insolvency. To mitigate this, we propose encouraging competition, not just in trading execution, but also in the provision of bids on the portfolio in the event of insolvency. By fostering collaboration and encouraging a collective approach to problem-solving, we believe that the DCX represents the paragon of crypto. It offers a new framework that can help us move past the systemic risks that have plagued the industry in the past. We invite all industry stakeholders to join us in this exciting journey towards the future of cryptocurrency trading. ## Recent Advancements in DeFi: RFQ, Intents, Solvers The DeFi landscape has been undergoing a rapid transformation, with advancements in Request for Quotation (RFQ), intents, and solvers leading the charge. These innovations are now being actively explored by DEXs and DEX aggregators, with the aim of optimizing trade execution for off-chain users. ### Request for Quotation (RFQ) RFQ systems have been a significant development in the DeFi space. They allow users to request quotes for specific trades from liquidity providers, who then respond with the price at which they are willing to execute the trade. This system enables users to obtain the best possible price for their trades, reducing slippage and improving overall trade execution. ### Intents The concept of intents has been another major development in DeFi. Intents allow users to declare their intention to perform a specific action, such as a trade, before it is executed. This allows other participants in the network to respond to these intents, either by providing liquidity, offering a better price, or even front-running the intended action. This has led to a more dynamic and interactive trading environment. ### Solvers Solvers have emerged as a key component in the DeFi ecosystem. They are algorithms or entities that propose solutions to the settlement of trades within a DEX. Solvers compete with each other to provide the most efficient solution, which is then chosen by the protocol to execute the trade. This competitive environment ensures that trades are executed in the most efficient manner possible. Recent advancements in solver technology have been seen with platforms like CowSwap, 1inch, and the upcoming UniswapX. These platforms have developed their own unique solvers, each with their own advantages and strategies for optimizing trade execution. This competition in on-chain execution is a positive development for the DeFi space. However, what's missing is a comprehensive solution for portfolio and account margin. This is a critical aspect that needs to be addressed to further enhance the efficiency and effectiveness of DeFi trading. ## Identity, Account Abstraction, and ERC-6551: A New Paradigm in DeFi The DeFi landscape is witnessing a significant shift with the advent of new concepts around identity, account abstraction, and token-bound accounts (ERC-6551). These advancements are reshaping how accounts are managed and operated in the DeFi space, paving the way for a more secure, efficient, and competitive trading environment. ### Account Abstraction Account abstraction is a transformative concept in the blockchain space. It allows for the creation of accounts that are not tied to a specific address, but instead are linked to a smart contract. This provides a more flexible approach to account management, as the smart contract can define the rules for how the account is managed and used. This flexibility opens up new possibilities for how accounts can be structured and operated, leading to a more efficient and secure trading environment. ### ERC-6551: Token-Bound Accounts Building on the concept of account abstraction, ERC-6551 introduces a new way to manage accounts on the Ethereum blockchain. It allows for the creation of token-bound accounts, which are accounts that are tied to a specific token. This is a significant departure from the traditional model of Ethereum accounts, which are tied to a specific address. An ERC-6551 compatible account could be tied to a KYC identity for off-ramping purposes, or to something else, such as an email address, allowing for more flexible account management. ### A Competitive Marketplace for Trading Execution and Credit Creation The combination of account abstraction and ERC-6551 creates a powerful framework for managing accounts in the DeFi space. It allows for the creation of a marketplace of account operators who have programmatic property rights to an account's collateral. This marketplace can include CEXs, RFQ solvers, DEX aggregators, and more, each acting as potential operators for an account. This competitive marketplace allows for more efficient trading execution and credit creation for any individual account, as well as the aggregate of accounts. It ensures that trades are executed in the most efficient manner possible and that credit is created in a safe and controlled manner. These advancements in identity, account abstraction, and ERC-6551 are reshaping the DeFi landscape. They offer the flexibility and control needed to create a more secure, efficient, and competitive trading environment. ## Towards the Paragon of Crypto: A Decentralized Centralized Exchange (DCX) With the recent advancements in DeFi, particularly in the realms of identity, account abstraction, and token-bound accounts (ERC-6551), the stage is set for the emergence of the supposed paragonal product of crypto, a Decentralized Centralized Exchange (DCX). This concept, also playfully referred to as the "Daisy Chain Exchange" by our team, represents an exchange that isolates custody from trading execution and credit creation, transforming these functions into competitive marketplaces. ### Self-Custody and Competitive Marketplaces In a DCX, users have the option of self-custody, thereby enhancing the security and control over their assets. The separation of custody from trading execution and credit creation allows for the creation of competitive marketplaces for these services. This competition ensures that trades are executed in the most efficient manner possible and that credit is created in a safe and controlled manner. ### Solvency and Liquidation In this system, each ERC-6551 compatible NFT (representing an account) is designed to be solvent or face liquidation. This design ensures the overall solvency of the system. Bad debt is always absorbed by an account-specific lender. While a lender may be lending to multiple accounts, the system provides transparency, allowing for a clear view of which accounts have which lenders, who is safe, and who isn't. ### Role of CEXs and Centralized Lenders in Credit Creation In this model, centralized exchanges (CEXs) and lenders can still play a significant role in credit creation. However, their role becomes more specific and targeted. Instead of issuing credit on a broad scale, they would issue credit to individual accounts or portfolios within the network. This could be based on off-chain deals or other arrangements, providing flexibility and customization in credit creation. ### Real-Time Understanding of Credit One of the key features of the DCX is the provision of real-time understanding of the credit being built up in the system. This allows for the visualization of the "daisy chain" of credit creation in the industry. By providing a clear and up-to-date view of the credit landscape, it enables users, lenders, and regulators to better understand the risk profile of the system and make more informed decisions. The concept of a DCX represents a significant milestone in the evolution of the crypto industry. By leveraging recent advancements in DeFi, it offers a more secure, efficient, and competitive trading environment. It provides a real-time understanding of the credit being built up in the system, ensuring the overall solvency of the system, and offering a clear view of the risk landscape. This new paradigm promises to redefine the future of cryptocurrency trading. ## Summary As we look towards the future of the crypto industry, we propose a unified standard for a Decentralized Centralized Exchange (DCX), also known as the "Daisy Chain Exchange". This standard leverages the recent advancements in DeFi, particularly in the realms of identity, account abstraction, and token-bound accounts (ERC-6551), to create a more secure, efficient, and competitive trading environment. ### The DCX Concept: Trading Accounts, Trading Execution, and Lenders The DCX model is built upon three main components that work together to create a dynamic and competitive marketplace for trading execution and credit creation. These components are: trading accounts, trading execution, and lenders. Trading accounts in the DCX model are on-chain, with the option for self-custody. This provides users with enhanced security and control over their assets. Trading execution in the DCX model is handled by solvers, RFQs, and CEX operators, ensuring that trades are executed in the most efficient manner possible. Lenders in the DCX model issue debt to each account, finding bids in the event of insolvency, providing flexibility and customization in credit creation. ### Skewed Incentives and the Need for Competition However, this system also presents potential challenges. For instance, the incentives can become skewed when lenders are also the ones determining insolvency. This could lead to conflicts of interest and potentially destabilize the system. To mitigate this, we need to encourage competition, not just in trading execution, but also in the provision of bids on the portfolio in the event of insolvency. ### Moving Past Systemic Risks By fostering collaboration and encouraging a collective approach to problem-solving, we can leverage cutting-edge technology to avoid the pitfalls of the past, such as the blowups of 2022, and create a more resilient and robust crypto trading environment. The DCX, with its focus on self-custody, competitive marketplaces, solvency, and real-time understanding of credit, represents a significant step towards this goal. In conclusion, we believe that the DCX represents the paragon of crypto. It offers a new framework that can help us move past the systemic risks that have plagued the industry in the past. We invite all industry stakeholders to join us in this exciting journey towards the future of cryptocurrency trading.