GNOSIS DUTCH EXCHANGE. DX Gnosis Blog

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1 GNOSIS DUTCH EXCHANGE DX Gnosis Blog

2 The GNOSIS DUTCH EXCHANGE is a decentralized exchange for ERC20 tokens using the Dutch auction mechanism to determine a fair value for tokens.

3 Traditional Order Book: a Continuous Auction Order book Limit order: Order gets placed on order book Bid: Specific amount to buy at a specific price Ask: Specific amount to sell at a specific price Spread: Ask-Bid difference Market order: Immediate execution Continuous auction Serial processing of orders (one-by-one) Orders matched using pay-as-bid pricing (discriminatory pricing)

4 Problems with the Order Book Model Front-running (information) High frequency trading (speed) Overlapping (crossed) order book (arbitrage) In illiquid markets: big spread, high slippage (volatility) Copying order books from other exchanges to inflate own volume Applying the order book model to the blockchain seems inadequate: there is no continuous time on the blockchain, there is only block time! It amplifies the front-running problem: more time and more parties to practice front-running

5 Gnosis DutchX: applying Auction Mechanisms Discrete auction (batch or call auctions) Batch processing of orders, all-at-once clearing time Orders matched using single-price clearing (uniform pricing) Dutch auction Start with high but falling price When all fungible goods are sold, auction closes Price is the same for all bidders and equals last price to close auction

6 Two States: Seller and Bidder Participation Token A (Sell) <-> Token B (Bid) (1) Prior to auction Sellers Bidders Depositing of Token A Not active (2) Running of auction Not active

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8 Start and End of any Auction Start of a particular token-pairing: Opposite auction pairings start at the same time At the earliest 10 minutes after end of the last auction of same pairing Plus an equivalent of USD 1,000 worth of funding in one auction At twice the last closing price End of an auction: Last bid closes the auction Time function reaches point to clear the auction No bids - ends after 24h All participants obtain the same last price! Length of an auction: Depends on price 6h to reach prior price

9 Particular Pairing over Time

10 Potential Users Distinction: Seller - anyone Bidder - likely experienced traders or market makers. Theoretically anyone Specific user groups or use cases: Listing for new token projects Buybacks for token projects Funds Smart contracts Market makers (Gnosis) prediction market: trading of outcome tokens

11 Listing Tokens and Initiating Token-pairings Anyone can add ERC20 Tokens based on rules in the smart contract Step 1 Listing by ETH / New Token: 10,000 USD worth of ETH funding Setting the price Starts 6h after conditions are met Step 2 Initiation of any Token / Token 10,000 USD worth of ETH funding Starts 6h after conditions are met

12 Advantages of the DutchX Mechanism (1/4) No front-running by any party Seller: Potentially 6h to deposit Bidder: Price function decreases so slowly, almost no price changes over a number of blocks - less important when transaction is mined Auction clears with same price for all bidders and sellers - irrelevant when transaction is mined Exchange cannot front-run due to automatic on-chain settlement

13 Advantages of the DutchX Mechanism (2/4) Volatility and fairness Fair market price by optimal strategy Safe to include sell orders of any size without slippage (no order book spikes) Automatic on-chain matching with one clearing price: no overlapping orders / arbitrage Batching orders: better for illiquid markets Matching a market order with multiple limit orders Price volatility of a traditional order book

14 Advantages of the DutchX Mechanism (3/4) Gas cost Gas costs on the DutchX are very similar to decentralized exchanges currently live 1. There is no cancellation of orders (no gas costs) 2. The participant can choose a low gas price 3. No risk of incurring gas costs due to traders trying to fulfill the same order

15 Advantages of the DutchX Mechanism (3/4) Example of failed orders on another DEX - transaction costs still occur!

16 Advantages of the DutchX Mechanism (4/4) Usability of other smart contracts No off-chain signing needed No receiving of orders off-chain and submission to the blockchain No strategy needed to participate Other smart contracts are able to convert tokens Reliable on-chain price oracle Fair market price for tokens Increased price stability Comes at the expense of quick trading - but: No high frequency traders

17 Tokens in the Dutch Exchange No specific tokens are needed to participate in the DutchX! GNO is not required OWL is not required but may be used Tulips are not required but intrinsic to the DutchX Used for fee reduction Generated and credited by trading on the exchange 1 Tulip for every 1 ETH worth of trade of whitelisted tokens Tulips are locked by default for use Request to unlock: after 24h tradable

18 Fees on the Dutch Exchange Fees: 0.5% for seller and bidder Paid in the participating token Up to half may be paid in OWL (1 OWL = 1 USD) Reduction of fees: Based on locked Tulips Beneficiary of fees: Fees do NOT go to Gnosis Fees paid in OWL are burned Fees paid in any token stay in the ecosystem and will be attributed to the next running auction of the same pairing

19 Fee Reduction Model

20 SELLER DEMO

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