Decentralized exchanges are the future of finance. As interactive distributed markets, they
respect individual sovereignty by enabling self-custody. Also, they can’t be arbitrarily shut
down due to the lack of central points of failure, and enable greater privacy.
In a nutshell, decentralized exchanges are everything traditional financial services wish
they could be. And before the central bankers of today realize what’s going on and try to
catch up, most of their services will have already been replaced.
Decentralized Exchanges, Security, and Financial Sovereignty
On a decentralized exchange you can’t lose your coins due to poor system security. If the
contemporary bandits decide to rob the bank, the most they can do is steal funds from
individual accounts that practice poor security.
In the world of DEXes, you can’t have another Mt. Gox hack or Binance dramatic breach of
“safuness”. As long as you take good care of your private keys, it’s impossible to lose any
funds. And if somebody else does a poor job at exercising their financial sovereignty, you
won’t be affected.
Decentralized exchanges respect the “not your keys, not your crypto” principle, as users
are pushed to embrace responsibility. The safety of each individual’s funds depends only
on personal actions. And a well-designed DEX will only encourage the best practices
through smooth foul-proof interfaces. Ultimately, users will exercise financial sovereignty
without even realizing it and enjoy all the benefits.
Decentralized Exchanges and Privacy
Speaking of security, let’s talk about the element that precedes it: privacy. If you hold your
coins in a bank and your coins in a centralized exchange, you’re entrusting a third party
with your entire account information – including personal data which links to your identity
Centralized institutions will always be a honeypot for thieves. And sometimes the criminals
don’t even have to steal funds from the bank or exchange: all they have to do is get your
private data, follow you home, physically attack you, and extort the money.
In this regard, the most secure data is the one that doesn’t exist on any record in the first
place. And decentralized exchanges enable a greater degree of anonymity. Signing up
only requires minimal information, and you don’t have to trust anyone with your data.
If your address is not available online, then you’re physically safer. And if the amount of
data that can be found about you is minimal, then stealing your private keys becomes way
too difficult and costly to deserve the effort. Decentralized exchanges boost your security
indirectly, by minimizing the attack surface and maximizing your sovereignty.
Decentralized Exchanges and Uptime
The networking argument is also relevant when dealing with any kind of exchange: have
you ever tried to trade on BitMEX during a time of intense market activity, only to discover
that the experience is slow and clunky due to system overloads? Have you tried to buy or sell cryptocurrencies on Kraken in January 2018, only to discover that the exchange was down for multiple days? Scalability issues and arbitrary shutdowns are common issues for centralized exchanges.
Thankfully, decentralized exchanges fix this problem as part of their design. In order to
combat censorship, they distribute nodes across multiple geographic regions. Involving a
large number of jurisdictions guarantees more network robustness, and broadcasting data
from more countries greatly reduces connection latencies.
Ultimately, a decentralized exchange is both scalable and provably censorship resistant.
And the more users run nodes, the stronger the network becomes. These design features
guarantee predictably fast availability at any time, regardless of the intensity of ongoing
trading. At scale, they will disrupt existing centralized alternatives.
Decentralized Exchanges and Reserves
When you deal with centralized exchanges, you trade against existing liquidity reserves.
You have to trust that these reserves truly exist and the company doesn’t engage in some
sort of fractional schemes. Also, you must get used to constant refusals to publish a proof
of reserves report – the first and last exchange to undergo such a process was Kraken in
Conversely, decentralized exchanges are transparent and direct. You post an offer to
purchase crypto, and somebody sells it to you if they find the price convenient. If you want
to sell, you just write down the amount and price. If another market participant likes your
offer, then you should expect a quick transaction to occur.
Instead of reserves, you have escrows, and double hash-locked contracts with smart
contract functions. You don’t have to trust humans and opaque systems, you simply deal
with auditable open-source code. Therefore, decentralized exchanges are much more
objective and direct in applying rules. While Coinbase needs to hire dozens of employees
to handle support and conflict resolution, DEXes simply use powerful automated tool that
eliminate human subjectivity.
The Challenges of Decentralized Exchanges
From every theoretical perspective, decentralized exchanges are great. But unless their
practical implementation is robust and fair for all participants, the mass transition from
centralized services will not happen.
One important factor is scalability. If the demand exceeds the network’s capacity, then the
service will underdeliver. And as long as such scalability issues exist, centralized
exchanges will have reasons to attract users with their services.
Then there is the issue of fairness. Defined loosely and broadly, decentralized exchanges
are different from their centralized counterparts thanks to the lack of a central point of
failure. Having multiple nodes to operate the system is an essential requirement for every
DEX. However, the balance of power and decision-making equality between nodes is also
important. If one node is deemed as more trustworthy and important than all the others,
then decentralization is pointless.
Furthermore, fairness must also apply to users. If the rules are applied differently
depending on status of volume, then there won’t be any incentives for small players to join.
And if small users join en masse and want to receive the same treatment as whales who
trade high volumes, then they will establish cartels to gain political relevance. If this
happens, then yet another Pandora’s box is opened and the system becomes even more
Another essential component of decentralized exchanges is liquidity. It’s important for a
DEX to move large amounts of cryptocurrencies on a daily basis, as users will more easily
find good trades for themselves. If asks and bids remain unfulfilled for a longer period of
time, then the users will most likely give up on the DEX and move their money on another
platform. Thankfully, decentralized exchanges seem to follow a trend of hitting all-time highs in terms of volume every month.
Last but not least, seamless usage should be mentioned as a challenge. If the user
interface is too complicated, then lots of traders who otherwise like the idea of a
decentralized exchange will choose to stay away.
If we really want to transition from the tyranny of centralized services as soon as possible
and decentralize finance, then we need to build the most intuitive and comprehensive user
experiences possible. If grandpa Joe wants to buy some bitcoins and trade them for
another cryptocurrency that he thinks provides value, then he should be able to do it
without struggling with clunky interfaces or complicated navigation.
The Tagion DEX takes on all of these challenges and aims to offer the decentralized
exchange that sparks the irreversible transition from traditional trusted platforms. We’re
here to start the historic exodus which diminishes centralized control over finance and
leads the path to a new era of freedom and sovereignty.
Internal and External Assets on the Tagion DEX
The Tagion DEX allows everyone to trade cryptocurrencies without the need for a
mediator. Furthermore, since Tagion has sub-darts which enable the creation of native
currencies with proprietary governance models, the DEX is an ecosystem where both
internal and external cryptocurrencies can get traded.
The internal cryptocurrencies are the ones that get minted using the Tagion protocol and
smart contract features. They serve purposes defined by their developers and
communities, and also help fund interesting projects. By default, these cryptocurrencies
can be denominated in tagions. This is one of the internal trading features.
But thanks to the Tagion DEX, bitcoins and many other external coins can be swapped in
a free and inclusive market. An ecosystem which seamlessly integrates trading between
its native currencies and popular cryptos is designed to better support development
incentives. A free and decentralized market where internal coins can get swapped back
and forth for external coins (and vice versa) is useful to build value.
How Trading Works on the Tagion DEX
In order to make it possible to decentralize fair price discovery and price matching, Tagion
has ordering. Combined with the routing functionality of the Lightning Network, the Tagion
network accomplishes decentralised trading between Lightning Network compatible
cryptocurrencies (tagions, bitcoin, ether, litecoin, and more).
Furthermore, the bids and asks are placed in the network. This enables full transparency
and order depth for all users.
By design, the Tagion decentralised exchange (DEX) always trades other currencies
against Tagions (TGN). This helps create high liquidity and consequently increases the
matching probability. For example, a user exchanging BTC to LTC does two consecutive
trades: the first is BTC to TGN, and the second is TGN to LTC.
The exchange supports the guarantee model, where the alien currency seller locks an
amount of tagions to their corresponding ask. If they then do not fulfil the order on their
side by revealing the secret key to the Lightning-network, the guarantee amount is lost to
the counterpart. This system is an extra incentive for the deal to take place.
For increased convenience and ease of use, the Tagion DEX handles order bids and asks,
and also does price discovery, matchings and settlements. The DEX utilizes the needed
channels and functionality from the Lightning Network.
The Tagion DEX guarantees fair bid/ask price matching and fully decentralised order
execution through the use of the latest innovations in the Lightning Network and Tagion.
Thus, the routing problem of the Lightning Network is successfully solved.
Due to the low-level system design, the order placing and revoking will have some delay.
Some friction gets added in order to make price pumping by large players much riskier,
therefore resulting in a healthier balance between small and big traders.
Technical Explanation for How Tagion DEX Works
The following example uses bitcoins for the bid/ask process and explains how tagions are
integrated in the trade. For convenience, tagions get abbreviated as TAGs.
- A user bids 2000 TGNs for 2 BTC, max price: 2000/2 = 1000
- A user asks 2200 TGNs for 2 BTC, min price: 2200/2 = 1100
- A user asks 950 TGNs for 1 BTC, min price: 950/1=950
4. Another user asks 900 TGNs for 1 BTC, min price: 900/1 = 900
5. A user bids 2300 TGNs for 2 BTC, max price: 2300/2 = 1150
Conditional Steps Involved in a Trade on Tagion DEX
Create ask order list by sorting all ask orders by the following criteria:
Minimum price, lowest first;
Price discovery of minimum ask price is done by taking the first price in the
ask order list.
Create a bid order list by sorting all bid orders after:
Maximum price, highest first;
Matching of orders:
If max bid order price => min ask order, then continue;
else display “no match” and stop.
Take all bid orders with a price higher or equal to the min ask price.
Short the bid orders after time.
Matching the first bid order with the first ask order.
Settlement of orders:
If bid order size == ask order size: remove them from their order lists and
settle both orders. Go to matching 1.
If bid order size > ask order size: remove the ask order from the ask order
list, settle the ask, part-settle the bid order and deduct the settled size from
the bid order. Go to matching 1.
If ask order > bid order size: remove the bid order from the bid order list,
settle the bid order, part-settle the ask order and deduct the settled size on
the ask order. Go to matching 1.
All the numbers here in this example are fix-point-numbers, as 1 BTC equals 100e6
This means that 0.12 BTC is 12e6 satoshis calculated in integers, as opposed to floating
points. In the table, they are written as decimal numbers in BTC and TGS.
Each row in the list is an offer.