A Tough Choice
Any swap of any cryptocurrency occurs on one of two types of exchanges: Centralized or decentralized. Each style carries its own pros and cons.
Centralized exchanges offer convenience, speed, and liquidity. At least for now, centralized exchanges have much higher trade volumes than their decentralized counterparts.
But those comfortable amenities come with risk. It’s no secret that exchanges are hacked on a regular basis. Most attempts fail, but 2018 has seen more than its share of high-profile, multi-million-dollar hacks.
When you’re transacting millions and billions of dollars in crypto every day, your operation is super attractive to thieving thugs.
Now, the reputable exchanges tend to reimburse their customers for any hacked funds. Still, you wouldn’t want to go through that hassle.
Not keeping large amounts of crypto on a centralized exchange is a common practice. Holding just a little for trading purposes is fine but it’s best to keep your tokens inside wallets you own the private keys to…
Being Your Own Bank
Maintaining possession of your keys is arguably the best part of using a DEX. You’re always in control of your tokens’ destiny.
But now that we’ve gained security, we’ll need to deal with low volume and slower trade times.
In addition to losing quickness and liquidity, DEX users are faced with the profit-stealing drawback of being unable to trade on margin.
No matter if you’re running long or stopping short, you’ll have to use a centralized exchange because DEX-based margin trading doesn’t exist just yet.
And that’s the whole point of project bZx.
When Platform Users Become Losers
Troubled positions are a major component of the margin-lending system. It’s where the dollars are made.
You see, by betting that an asset will increase or decrease in value, you’re taking a risk that the market won’t agree with your assumption.
If there’s a violent swing against you, your entire account gets liquidated and you can change your name to Rekt.
Just like lotto, all the losers feed the winners and system operators.
But sometimes, positions aren’t liquidated in time. In those instances, unlike lotto, the loser can withdraw remaining funds. They gambled and lost, but get to partially skip out on their bet.
Plus, the volatile crypto market is prone to FOMO and FUD?—?often irrationally?—?and may encounter an overall price-disrupting event at any given moment. The entire platform can suffer during those occurrences.
Now, the bZx project has already laid plans to attack the potential for loss of funds. Forced liquidation?—?backed by Ethereum smart contracts, blockchain oracles, and even bounty hunters?—?is the main method of defense.
But the team added yet another safety net to the mix…
Safeguarding Your Tokens
Lenders on the bZx network are the ones realizing the most gains.
Borrowers do, too. But they’re the ones taking the most risk and thus the ones that lose more often than they win.
The same concept applies to casinos. They remain profitable operations because they run games with a high probability of a victory for the house.
To maintain and protect gains from loss, the project created a DIF?—?Decentralized Exchange Fund. The fund is denominated in Ether as well as the network’s BZRX token.
It’s important to note that governance plays a big role here.
You see, as the network collect fees, some are returned to lenders and borrowers in the form of SUGR tokens. And those tokens give their holder the power to vote on how the overall network operates.
If something major disrupts the crypto market, SUGR holders would need to agree upon terms before the DIF is activated to restore principle balances.
And there’s another little wrinkle to point out…
Token holders have the authority to enforce eligibility requirements. It could very well turn out that those using lots of leverage on their positions won’t be able to use insurance should the need arise.
However, there are a lot of ‘ifs’ in the equation. I don’t feel it’s anything to be overly concerned about. If nothing else, borrowers could use leverage only to the maximum insurable amount.
The bZx project aims to provide a best-of-both-worlds?—?centralized and decentralized?—?crypto exchange solution.
Users get the security of keeping their private keys private, while gaining access to high liquidity and margin trading.
And by creating the network’s Decentralized Insurance Fund, the project is giving even more incentive for ERC20 HODLers to lend their tokens out to borrowers.
Not only is bZx adding token functionality to those holding an ‘unBank’ account, the project’s also providing a service that’s found within traditional banking markets: Deposit insurance.
As a user of any exchange?—?centralized or not?—?you need to feel comfortable about the safety of your funds. You need to be confident that your funds will be there waiting for you the next time you log in.
And by allowing margin trading within any DEX?—?and backing it up with a bespoke, community-governed insurance policy?—?bZx allows traders to always keep funds under their own control.
So, my question to the operator of any decentralized exchange is: Why wouldn’t you want to integrate the bZx protocol into your network?