Introduction to AtomicDEX
One of Komodo's blockchain tools is an atomic-swap powered, decentralized exchange (DEX), called AtomicDEX.
Komodo’s AtomicDEX software is entirely separate from the komodod software that powers the rest of Komodo.
Because AtomicDEX is built on atomic swaps, developers and users can rely on it to exchange cryptocurrencies at will, and without any middleman involvement. Users of this software maintain full control over the private keys of their assets at all times. This dramatically increases the security of the exchange process.
This software is capable of facilitating atomic-swap exchanges between approximately 99% of the coins listed on coinmarketcap.com. All coins were listed without charge.
When it comes to DEX technology, Komodo has a remarkable story.
In April 2014, Komodo’s lead developer experimented with his first atomic-swap prototypes. By August of 2017, Komodo released version 1.0 of the atomic-swap DEX software, allowing anonymous Internet users to perform over 100,000 atomic swaps via automation. These are but two examples of how Komodo has led the way in atomic-swap DEX technology since the beginning.
To understand AtomicDEX, one must first understand what a decentralized exchange is, why it is important, and how atomic swaps come into play.
This discussion requires a small amount of foundational knowledge. The reader should be generally familiar with blockchain technology and should understand the basic ideas of the Komodo project.
For a broad overview of Komodo, head to the About Komodo Platform section For a more thorough understanding of general blockchain technology, check out the Delayed Proof of Work section of the Core Technology Discussions. This section gives an overview of how a blockchain works and why it matters.
After reading the above articles, the following discussion should be attainable.
In the world of cryptocurrency, the goods we are trading are our digital assets. These can be coins, tokens, or other forms of digital rights and property. By nature, each digital asset is bound to the individual blockchain that secures its transaction history.
So long as a user exchanges these assets within their parent blockchains the normal methods of conducting transactions are sufficient for trading. However, questions arise once the user wants to exchange assets on one blockchain for assets on an entirely separate blockchain.
Typically, separate blockchains have separate demographics of miners and stakers securing the history. When a user trades value between the two blockchains, by default there is no inter-chain security mechanism that can ensure that the user's trading partner does not cheat, and that technical difficulties do not destroy the user's assets.
The simplest solution is to abandon decentralization during this process and trust a third party. This describes a normal "centralized exchange" (CEX), such as Coinbase, Kraken, and Binance.
To conduct an exchange using a CEX the user must entrust their digital assets to the CEX's care during the process. The user sends their digital assets to the CEX, and the CEX then issues the user "I Owe You" (IOU) tokens that represent the user's ownership of these assets.
The user is then within a single environment that is controlled by a centralized authority. This grants all the benefits of the old system to the trading process, including greater speed of development and design.
Throughout this experience the user relies on the security of a centralized third party to ensure that their purchases and sales are conducted honestly and accurately. When the user is finished exchanging, they hand back their IOUs and tell the CEX the address where they would like to export their purchases.
Once the user receives their digital assets back into an address which they control, they are again truly the "owner" of these assets.
Assuming all goes as intended, a CEX is an efficient and effective tool for trading cryptocurrencies. However, reliable CEX's readily state that this model carries great risk. Many of the highest quality CEX's are looking to change their model to mitigate these dangers.
The primary concern for a CEX is security. When a user places their assets on a centralized exchange, the private keys to these assets are held in a database that, by nature, must have some kind of connection to the public Internet. As the database must always be available online, an attacker can penetrate an individual user's account and gain control over the IOUs even when the user is offline. The attacker can then trade these IOUs at malicious prices into an account the attacker controls and withdraw the true assets.
Furthermore, this database holds the assets of thousands of other users. Having a large amount of vulnerable funds on the Internet is an additional incentive for attackers. As reported by IG Group studies, from 2017 to 2018, nearly 1 billion US dollar's worth of digital assets were stolen from major exchanges around the world.
A CEX has several challenges to consider as a result of this danger. From a legal perspective, the infamous Mt. Gox case illustrates how users may attempt to hold the CEX liable in the event of a theft. A CEX may struggle to find an insurance provider that will protect them. Also, compared to fiat currency, government authorities can do little to assist in recovering stolen funds.
| Perspective | Pros | Cons |
|---|---|---|
| User | The IOU exchange process is high-speed, simple, and often has a pleasant interface | Compromising the user's individual account is achievable for a determined hacker, and there are effectively no methods to recover funds stolen from a CEX |
| User | Because the CEX model has many users, a CEX is more likely to achieve high liquidity | The high user population motivates sophisticated attackers to compromise the entire site |
| User | A large CEX can handle the complexities of holding and using cryptocurrencies | Once a user gives up control over their funds to the CEX, the user can only trust that the funds will be returned |
| Exchange Owner | Without decentralization, business development is often faster | In holding thousands of user's personal funds, the exchange owners assume an enormous amount of liability |
| Exchange Owner | The automated aspect of cryptocurrency allows for fast profits through small fees | The owner must be wary of thieves even among their own employees |
In light of these concerns, many reputable and established CEX's are turning to decentralized technologies. For example, Binance, one of the most popular CEX's on the Internet, is moving swiftly into DEX technology to enhance both security and functionality for their users.
To understand why a CEX may wish to implement decentralized technologies, one must first understand how a typical decentralized exchange (DEX) works. There are many types of DEXs, each having a unique technical structure. Perhaps the most popular DEX format is a decentralized gateway.
| Type | Summary | Examples |
|---|---|---|
| Decentralized Gateway | A decentralized network of gateway keepers hold user funds in escrow and issue IOUs for trading | InstantDEX, Bitshares, Binance DEX |
| On-Chain Token Exchange | Tokens created on the parent blockchain are traded within the consensus rules; by adding gateway nodes, this can also extend to become a decentralized gateway | EtherDelta, 0x |
| Non-Custodial Exchange | A centralized website arranges for a moderately secure, but non-decentralized trade between liquidity providers and purchasers; there is no order book and the exchange's control over user funds is limited | ShapeShift, Changelly |
A decentralized gateway can be thought of as a cryptocurrency holding station that is owned and controlled by several different parties. The gateway performs two functions: it holds the assets that users send to it, and it issues IOUs.
The IOUs issued to the user do not derive from a centralized database. Rather, they are managed through a blockchain. The user maintains control over the private keys to their IOUs at all times. While this method is not as secure as having access to the private keys to the true digital assets, the method does provide some protection. Assuming the user knows how to secure their private keys, when the user is offline their IOUs are not vulnerable to attackers. This is one improvement over the CEX model.
The user trades their IOUs with other users in much the same way as on a CEX. When a user is finished trading, they send their IOUs back to the gateway, and with this transaction they include an external address to which they would like their funds withdrawn.
Now comes another key difference. The actual assets that the gateway is holding are contained in a special type of blockchain address. It is special because it is owned and controlled not by one person or central authority, but rather by several people or parties working together. This address can collect funds from anywhere and from anyone. However, it can only release funds when several of the address’s owners grant permission. This special type of blockchain address is called a “multi-signature” address.
Because a multi-signature address requires several different parties to sign the release of funds, the gateway is able to provide an improved measure of security. For an attacker to succeed, they must compromise several different parties, rather than a central authority.
In many ways, this popular DEX model is an improvement over the CEX model, and this is why many CEX's are expanding into this territory. Users have control over their IOUs, making them responsible for individual attacks, rather than the exchange owners. The risk of an exchange-wide attack is also shared across multiple parties.
| Pros | Cons |
|---|---|
| Tokens can be issued for any asset, including both cryptocurrency and fiat | This method requires a wide network of trustworthy and technically proficient business partners |
| Users maintain ownership over their IOUs at all times, limiting attackers' capabilities | All true assets are still in the ownership of a small group of people, albeit somewhat decentralized, and therefore susceptible to attacks, errors, and corruption |
| IOUs are on-chain, and therefore buying and selling funds can be performed at high speeds | Maintenance and improvements to the DEX are highly technical, time consuming, and cost prohibitive |
For a developer and entrepreneur, the DEX method is more secure than the CEX model, but there remain many difficulties on technical and political levels. The entrepreneur must find trustworthy partners to be co-owners of the multi-signature address. The developer must ensure that their partners' infrastructure and other technical contributions are secure, as a failure by the partners can reflect poorly on the developer and entrepreneur's own brand.
Furthermore, from the user's perspective, the primary danger persists in this DEX model. Once the user sends their assets to the gateway, the user loses control and responsibility over their true assets.
What if there was a way to trade different types of cryptocurrencies without the user ever transferring control until the trade is complete? Could a user keep the private keys to their assets, and only deal directly with their trading partner and not with a third party?
This is the idea of an atomic swap. It is simply a trade of assets between two users where, assuming both behave honestly, ownership over the assets is not released until both sides are secure in receiving a fair outcome. If one side tries to cheat or makes any kind of mistake, they cannot receive a financial reward from it, and the non-offending side cannot be penalized or lose their funds.
An atomic swap can do everything else that both the DEX and CEX models can do. Atomic swaps can be conducted quickly; users may form networks of high liquidity trading; nearly all types of cryptocurrencies can be exchanged.
However, the nature of an atomic swap is unique in comparison with the opposing models, as an atomic swap does not require third-party intervention. This can provide simplicity for both the user, the entrepreneur, and even the developer. Depending on the application, the cost may also be dramatically cheaper, as far less infrastructure and manpower is required.
| Capability | Atomic Swap | Decentralized Gateway | Centralized Exchange |
|---|---|---|---|
| Third party is not required | Yes: The entire exchange happens between two users; no third party is required | No: The exchange relies on a decentralized network of gateway nodes, who must be trusted | No: Users depend on a centralized company to maintain and secure their funds |
| An exchange can be set up by anyone | Yes: Requires only two users and an Internet connection | No: Requires sufficient technical knowledge, funding, and committed business partners to serve as gateway nodes | No: Requires sufficient technical knowledge, funding, and a higher level of business and legal knowledge |
| Users maintain control over the funds throughout the process | Yes: Users maintain control over their funds until the trade is completed, at which point ownership is swapped atomically | No: Users relinquish ownership to the gateway nodes, although users do hold private keys to IOUs | No: Once the user sends funds to the CEX, they only own their funds in theory until the funds are returned |
| User funds remain distributed and decentralized throughout process | Yes: As users maintain ownership over their funds at all times, all funds in the exchange process are never in a central location | No: User funds are held in a collection of multi-signature addresses that are maintained by a small group of people | No: User funds are held in a centralized database, managed by company employees |
This is probably enough to get the basic idea. If the reader desires a more thorough understanding of the atomic swap process, read the AtomicDEX and Atomic Swaps section of the Core Technology Disucssions.
The underlying ideas of atomic swaps were invented by Tier Nolan in 2013. He posted his ideas on an online community forum where Komodo's lead developer and primary visionary, JL777, or "James" for short, was also exploring blockchain technology. Here’s where Komodo enters the picture.
Upon reading Nolan’s discussion, James began experimenting. In April 2014 he wrote his first experimental software for allowing anonymous users on the Internet to conduct on-chain atomic swaps between two assets on the NXT blockchain.
In September 2015, James performed an experimental atomic swap between Bitcoin and NXT. Like all Bitcoin-based atomic swaps performed during this time period, James's atomic swap could not be considered secure as Bitcoin software lacked a feature called "Check Lock Time Verify." This feature was added in November 2015, and James performed a secure atomic swap shortly thereafter.
At this time, James also began the creation of his current endeavor, the Komodo ecosystem. Additional team members were hired, money was raised, and large-scale software and company development began.
From its foundation, the Komodo ecosystem is designed to facilitate blockchain interoperability and scalability, and our atomic-swap software plays a key role. In August 2017, Komodo released version 1.0 of the first atomic-swap based DEX to the public. Releasing this entirely new DEX software to the masses was an endeavor many years in the making, and countless volunteer developers and other dreamers contributed.
Upon release of Komodo’s DEX 1.0, hundreds of members of the Komodo open-source community collectively performed over 100,000 atomic swaps. It was the first time in history that users with no coding knowledge could trade assets without either a third-party acting as an arbiter, or even without any public knowledge of who was trading with whom.
Another point to mention is that while AtomicDEX is built upon atomic swaps, other software in the Komodo ecosystem is able to perform the rest of the functionality necessary to run other types of decentralized exchanges. As all Komodo software is natively integrated, this provides the Komodo entrepreneur with perhaps the widest range of DEX software packages in existence.
| Atomic Swaps | Decentralized Gateway | On-Chain Token Exchange | Cross-Chain Asset Transfers | ... and more! |
|---|---|---|---|---|
| Check! | Check! | Check! | Check! | Check! |
Today, Komodo developers took what they learned from version 1.0 and rewrote the code from the ground up to enhance essentially all aspects of the user experience. This is the AtomicDEX 2.0 software.
Recently, yet again Komodo forged into new territory with atomic swaps. In February of 2019, the Komodo team performed the first mobile-based atomic swap. The mobile version of AtomicDEX is available for Android and iOS devices, and the software interfaces seamlessly with our desktop software.
While the code behind Komodo's technology is complex, the good news is, the code takes care of itself. A developer and entrepreneur building on Komodo can simply fire up the software and access its functionalities through the API.
AtomicDEX is open source, meaning that we do not keep the software's source code private. Also, the Komodo team is creating a network that is open to other financially motivated businesses and organizations seeking profit in the cryptocurrency-exchange industry.
Many opportunities are available for cryptocurrency-exchange entrepreneurs to build their own audiences and businesses using Komodo software. Entrepreneurs can create their own market places on the main Komodo network for trading, or they can create their own private and public networks. Developers can use Komodo's back-end software API to feature atomic-swap DEX functionality in their existing or upcoming software innovations, including mobile software. Enterprise and other large-scale companies can reach out to Komodo for integration with Komodo technology, or even for consulting services.
Please reach out to the Komodo team for further information.