AMA Recap: CoinMühendisi-Firestorm

An AMA was held between CoinMuhendisi and Firestorm on the CoinMuhendisi Telegram channel on 10.03.2022.

Assuming you already know the team, I have skipped the introduction part of dialogues and moved on to questions and answers about the project.

Q2: Why a CLOB DEX over a CEX?

There are quite a number of benefits to moving trading activity over to a DEX as long as the user experience doesn’t suffer. Here are a few things that users have to accept/suffer when they use CEXs:

When you deposit funds into a CEX, the company that operates the CEX takes “custody” of your assets. Crypto is best known for one phrase since the early days of bitcoin: “Not your keys, not your coin”. CEXs literally take your assets into their own wallet which isn’t ideal.

CEXs are known to utilize customer funds for many different activities such as Yield Farming. In fact, if you look at the hot wallets of any of the large exchanges, you would see that they have staked/delegated customer assets way before the staking/delegation services went live. I have come across “airdrops” on these wallets that were given to only delegators/ validators for example. This custodial relationship where CEXs take your assets creates bad incentives, and gives the opportunity to CEXs to do stuff with your assets…

CEXs also are frequently disabling withdrawals/deposits and at times going down as well. The withdrawal disablements almost always come at the worst times, and while it’s always a “Technical” reason quoted, it’s difficult to say why it’s so frequent. I don’t like speculating much but I’ve heard a lot of theories around withdrawals getting disabled because tokens could be staked and may not be possible to give back to users for a certain period of time…

The last difficulty with CEXs is transparency. Nobody knows who the players are, and what kind of activity is taking place in their matching engines. Everything occurs in a “black box” on a server somewhere. This really doesn’t work well for the users or the regulators and we specifically believe that for the global crypto market to mature further, we need a lot more transparency. Even TradFi has very transparent trading “tapes” where anybody can go and check activity.

On the Dexalot side, we’ve moved the matching engine to the blockchain so anybody can see its logic (it’s no longer a black box), we do all trading (orders, fills, etc.) on-chain, which means the user, the exchange, the regulators and anybody else can very clearly and easily see the activity without ever depending on anybody else. And of course, Dexalot doesn’t take custody of your assets. The assets never leave the blockchain when a user is participating in trading on Dexalot.

We think these differences will really drive activity towards DeFi as users get more comfortable with decentralization, and as Avalanche establishes the power of its scaling solution, subnets.

Q3: Along the same vein of thought, why a CLOB over an AMM?

My view is that AMMs — and specifically the mother of all AMMs, Uniswap — came to exist because of protocol level problems on Ethereum. Ethereum, as you know, is by far the most dominant chain in terms of transactions and adoption (soon to change we hope) and because of its original design, it couldn’t handle the most capital-efficient way of trading which is Central Limit Order Book (CLOB) style trading. I know this quite well because I was part of a project in 2018 building a CLOB on Ethereum.

The blockchain itself can’t handle many transactions at once, finality (i.e., the time at which the order you send settles) is slow and transactions are quite expensive. All these combined made the user experience very bad and users needed a solution.

Clever folks at the Uniswap team worked around these protocol-level problems by eliminating the matching engine concept and replacing it with a constant product formula. It’s quite genius and it works well when your protocol isn’t as fast as Avalanche in terms of transaction speeds and finality.

However, when you do a comparison between a CLOB and an AMM, you could see:

• AMMs require a lot of TVL to give out good prices. Because it uses the constant product formula underneath, it requires the community to lock in a lot of capital in the AMM. If the capital locked in isn’t high, then any small trade would incur a huge market impact, i.e., trading small amounts of a token could cause the price to move by a lot! Additionally, users that provide capital to AMMs typically incur large amounts of “impermanent loss” which over time degrades the quality of capital that comes into AMMs.
• In comparison, CLOBs don’t have high capital requirements, just a single institutional market maker can provide deep liquidity and populate order books and respond to market needs. This is where the “capital efficiency” comes from. Additionally, not having a ton of TVL in a CLOB also makes it a much less attractive target for hacking/exploits. Therefore, CLOBs are less likely to have problems. I’m sure our audience is aware, a lot of AMMs get hacked quite frequently, some of them multiple times even!
• Another big friction point with AMMs is the fact that users always incur “slippage”. Slippage happens because AMMs by their very nature (due to the formula underneath) can’t really support limit orders. CLOBs by their very nature support limit orders and effectively allow users to trade with 0 slippage.
• Listing new assets on AMMs also trigger huge amounts of activity on networks, and it’s a net detriment to the community because AMMs can’t do proper auctions for price discovery. CLOBs by their very nature, allow auctions and in reality, the entire TradFi infrastructure depends on this mechanism to list assets or even open and close markets efficiently and fairly.
• In conclusion, now that we have the innovative Avalanche consensus which gives us roughly 1 second of finality, we believe CLOBs will start getting more popular and provide users the best way to execute. We anticipate getting 10–100x improvement on latencies, fees, and finality when Dexalot moves to the subnet which should make the experience virtually indistinguishable from a player like Binance. We strongly believe more and more users will move in this direction because almost everybody that comes to the crypto world enters it from one of the large CEXs anyways.

Q4: We also heard that you have come out with a new fair listing mechanism called Dexalot Discovery. Can you tell us a little bit about that?

Dexalot Discovery is our adaptation of TradFi market open mechanism into crypto. We’ve observed a ton of projects that got rekt not because the projects were bad, but because they didn’t come to market in a fair and safe manner.

To briefly describe how AMM listings work, up until now, projects had 2 options:

- Direct AMM listings

- LBP style listings

Direct AMM listings are the cases where projects just open up a pool on an AMM. This is very detrimental to investors and project enthusiasts because of the AMMs work. AMMs effectively favor the “first” buyer by giving them the cheapest price. The second person buys it at a price that’s more expensive than the first. Similarly, third person buys it more expensively than the second and so on… This implies, if you are fast, you’ll get the best price. If I’m a bot operator OR a validator that has power over the network, if I can make a reasonable bet that a project has a lot of interest behind it, then I can simply be the fastest guy to purchase the tokens and guarantee to make money. This is literally what happens to projects when they list themselves on AMMs. If you look at the on-chain activity, bots drive the price up, then come to the retail users trying to buy with their metamasks, and then bots crash the price back down by selling onto retail. This sucks, it hurts the projects, it hurts their communities, and it creates a lot of fud causing the project teams to lose focus.

LBPs try to solve the above problem, but they don’t work well at all either. LBPs are designed to “gate” buyers and sellers during the price discovery process. Simply said, LBPs typically create a period where they allow ONLY buyers to participate and identify a price. Then buyers are locked in for a period after the price is discovered, and the market is free for anybody else that has tokens, usually crashing the price. It’s relatively easy to see why this mechanism doesn’t work. This is about it, markets are very open and free at all times to both buyers and sellers. It’s really simple supply vs. demand economics. If there is too much demand and no supply, the price goes up. If there is too much supply and no demand, the price goes down. LBPs create an artificial environment where they create demand first, not let supply participate, and once the demand is depleted, open it up to suppliers. The outcome is pretty much the same as direct AMM listings.

There are examples of this on Avalanche as well, and every listing ran into the same exact problem. There is a huge drive-up in price during the LBP build-up phase which is followed by a drop (typically a big one). Again, very bad for the project, community, and investors. Additionally, the Avalanche-based solutions for LBPs inserted additional barriers where investors need to stake tokens and purchase the other leg of the LP token during the process as well. It generally doesn’t allow small investors to participate in the process which again reduces the success of a project.

Dexalot Discovery approach was intended to solve this problem once and for all and we wanted to make it barrier-free. Dexalot uses the CLOB to create an auction that takes anywhere from 12 hours to 24 hours. Users simply enter either buy or sell orders (no barriers, no staking, no additional requirements) and watch where the market goes. At the end of the period, the overlapping orders are matched based on the average mid-price and everybody (both buyers and sellers) get the exact same price and the market opens. Additionally, it’s directly integrated into platforms like Avalaunch and private investor dashboards, which allows private and IDO investors to sell at the opening transaction if they choose to do so as well.

We’ve launched the ALOT token, which is the native token or the Dexalot project, and the following price action after the launch is very clear and it’s been very successful.

Q5: This is a mechanism that is quite novel, and we are excited to see new projects listed with it! Can you tell us a little bit more as to what’s in store for Dexalot in the future?

We have a lot of things we are working on now that we have completed investment and IDO rounds. Here goes the list:

• We have a pipeline of 7 projects that is aiming to use Dexalot Discovery. We are engaging with new projects on a daily basis, and we anticipate this number to grow even faster given the success we achieved with the ALOT token.
• Dexalot is in progress to move to an Avalanche subnet. We think subnets will be the biggest innovation in 2022 and we are working hard to do our part. Our users will be able to get 10–100x speed improvement, and they will get significantly reduced fees and it will also allow validators to earn ALOT tokens when the project migrates.
• Dexalot is also working on simplifications on the front end. For example, coinbase has a regular offering and a pro-offering. We are also thinking about simpler ways to allow our users to trade. So, stay tuned for a simplified trading interface!
• All of our users are asking us about a staking mechanism for ALOT. Rest assured that the team is hard at work, and we’ll reveal details for this soon!
• Lastly, we are working on a simplified and streamlined mechanism that gives new projects a single point of contact to go from IDO to listings. It is very difficult nowadays to negotiate with so many counterparties and always make the right calls to get to market. Imagine, if you are a gamer building an awesome game, are you supposed to be an expert in market microstructure as well? Dexalot would like to make this very simple for all projects and create a very simple process for people to come to market without having to worry about all the pitfalls. We will announce this information soon but expect a big alliance with some big brands!

Q1: With security of paramount importance, what steps have been taken to ensure that Dexalot is free from vulnerabilities and will be a safe, reliable place to trade?

Fantastic question, and it’s a good statement, Security is of paramount importance. Here are the things we did/are doing for security:

• All our contracts have been audited. Our original code has been audited by Ava Labs as well as an external auditor. We are continuously working with auditors to re-check everything as there are improvements. This is fairly standard, but still worth mentioning :)
• We don’t need TVL to provide a good service to our users. This means, we aren’t a good target for attacks/hacks/exploits. Hackers have better targets to go after.
• We don’t collect information from our users, we don’t store information on our infrastructure. Therefore, there is low to no risk of user information being stolen.
• We have a separate and most importantly independent application that is currently in beta, that is watching the activity that occur on the exchange. It is currently intended as a monitoring solution, but as we prove its success we’ll expand its role. If there is any bad behavior, we’ll catch it very quickly. We already detected a lot of bots, etc. using this solution and we are watching closely

Q2: Please tell more about the roadmap of the @dexalotcom project. What are the most anticipated plans and events that we should know about for the next few days and months?

• We have a pipeline of 7 projects that is targeting to list with Dexalot Discovery
• We are simplifying our front end, and we’ll create easier ways for people to trade using the exchange.
• We are working on new order types (FOK, Stoploss, Take Profit, etc.) which we will enable soon.
• We are in progress to move to the subnet to reduce fees, improve speed and of course create a better user experience.

Q3: Can you talk about what the trading pairs on Dexalot will be and the fees on the platform?

We currently have: AVAX/USDT.e, AVAX/USDC.e and ALOT/AVAX

We are in the process of listing 7 new assets as I’ve mentioned earlier. But we are also working on onboarding institutional market makers who will help us create new pairs. We’ll look to list the main project tokens for the ecosystem as our market-making partners come online

Fees are intended to be cheaper than your alternatives. Maker (people who place orders that don’t trade immediately) will be charged 0.15%. Takers (people who remove liquidity from the order book, or people who trade immediately) will be charged 0.2%

Feel free to compare this to any other trading mechanism on Avalanche or elsewhere ;) Once we have more market makers, combined with our better spreads, we expect a much better trading experience for our users.

Q4: Can you please talk a little about what the business model for Dexalot is? Can you also touch on how Dexalot is looking to maintain the trust of its investors and what the vision is for the next 5 or 6 years?

Dexalot’s business model is simple. The exchange makes money when trading occurs. Our vision is also quite simple, we need to create better solutions for trading and we need to succeed only if our partner projects (folks who list with us ) succeed.

In other words, we don’t charge anything separate for any other service like Dexalot Discovery. We are looking to increase the number of assets listed, and we are looking to provide the best possible price in the ecosystem to our users in partnership with our market makers.

Regarding the future, crypto isn’t good for thinking out 5+ years. We are looking at the next year and as discussed earlier, our goal is to get to the subnet first, then onboard institutional market makers (brands like GSR, Jump, etc.) who also market make in tradfi, and push Avalanche and crypto forward!

Q5: Since the mainnet went live several months ago, there are currently three pairs added to the exchange. What are the plans for adding more, and can you describe the process? Is this open to external liquidity providers?

Good question. We are definitely looking to add more pairs. The challenge at the moment is, we are on the generic C-Chain. That implies, even if we add a lot of pairs, if there is a separate project (imagine a popular NFT drop) that slows the network down, our exchange would be affected. So, our plan is to get to the subnet first, then add as many assets as possible in partnership with our market makers.

We are currently more focused on Dexalot Discovery as it adds more value to projects and the ecosystem, and we’ll add other pairs once we move to the subnet.

Q1: If your project has strict regulations in the country with the most community, would you keep up with the regulations of that country and adopt the community, or would you cut off relations with that country?

Great question. We have a COO that is very experienced in legal and regulatory side. He has 20+ years of experience running operations for wall street firms. Our view is that regulation will eventually come to this space and having an exchange that’s transparent and open on a blockchain is a distinct advantage. With that said, we are currently not planning on securities or regulated assets. So, we’ll make the decision when the regulations are clearer.

Q2: Can you tell us about the marketing strategy your team will follow to increase awareness to help better understand the advantages of the technology developed by the Dexalot team in the crypto world?

Definitely. We have a very strong community focus. We’ll be in attendance at the Avalanche summit, if any of you are going, you will very clearly see our mascot — the Axolotl — at the summit. We are focusing on getting feedback from our community and we are looking to grow organically by giving information about us to as many communities as possible!

Q3: I saw that you would switch to the subnet. Will you switch to a known subnet or will you switch to a #Dexalot specific subnet?

We are currently planning on a #Dexalot specific subnet because if you switch to a subnet with many other projects, their activity will still affect your throughput. As an exchange, we are looking to scale to the maximum possible output for our users and we don’t want the experience to be affected by another application on the same network. This may change of course, but this is the current thinking!

Q4: You have partnered with a highly liquid project on Avax such as Colony. What did this partnership bring to Dexalot? What are the advantages of being on the Avalanche network?

We have fantastic partners. This is a great question for me to mention some of them. Among our backers we have:

• Muhabbit Capital
• Blizzard (they seeded Dexalot, and includes 3AC, PolyChain, Republic Capital, Dragonfly and many others)
• Republic Crypto
• Colony
• IPC
• AVenturesDAO
• KeyChain Capital (Benqi)
• Avalaunch
• GSR
• Woodstock
• Maximizer
• Maven, and many others!

The biggest advantages of being on Avalanche are:

• Great blockchain with the best tech out there
• Great community with very strong partnerships such as the ones listed above!

Each of our partnerships bring know-how, introductions, business strategy assistance and generally expertise for our team. Additionally, we have special opportunities to directly integrate with projects such as Colony and Avalaunch.

Q5: As a trader, I have invested in many tokens, some of which I hold, and some by staking, I provide short-medium-long-term gains in different ways. What will be the short-, medium- and long-term benefits and advantages it will provide me if I have $ALOT tokens?

Good question to talk about $ALOT utility.

Here are the utilities planned:

• In the near term, our users are asking us about staking. This is being worked on and we’ll reveal details soon (let’s say tentatively this month)
• $ALOT is the governance token, hence users will eventually be able to vote on new features and the direction of the project.
• $ALOT will also serve as the gas for the subnet. People will need to have $ALOT to pay for their transactions
• $ALOT will also be the token for validators to validate the subnet, and these validators (or delegators) will earn their rewards in this token.