What a fine day for science.
– Dexter, Dexter’s Laboratory
As Nick Szabo first said, trusted third parties are security holes. Nowhere is this more apparent than in popular centralized digital asset exchanges. Even if you don’t get hacked or robbed, and your customer data doesn’t get leaked, many users are still probably getting fleeced by schemes ranging from front-running to wash trading to founders stealing their own customers’ funds.
The beauty of smart contracts on public blockchains is that this exact kind of behavior in many cases can be mitigated or avoided programmatically. Decentralized exchanges in their current form introduce tradeoffs, such as illiquidity and vulnerability to front-running, but efforts to address and mitigate these challenges are in the works (more on this in a future post).
But we probably don’t have to convince you that DEX’s are the future. We just want to let you know that soon Tezos will have one — and its name is Dexter.
In fact, we already have a Uniswap-inspired prototype ready to try out on the Tezos Alphanet here via our walkthrough tutorial, for those proficient with the command-line interface. In our tutorial, we include a sample asset called “Tezos Gold”. Following in the footsteps of Uniswap, we also intend to develop an open-source front-end that anyone can try out for themselves.
Dexter is functionally similar to Uniswap; a simple, elegant, and entirely on-chain decentralized exchange — with no order book! With Uniswap anyone can become a liquidity provider by sending an equivalent value of ETH and an ERC-20 token to that token’s exchange contract. They will be rewarded with fees paid by those who swap tokens using the exchange contract (as of now it’s 0.3%). A very simple formula adjusts the exchange rate with each trade, based on the relative sizes of their respective liquidity pools. Buying a token will push up its price, and sellin...