FTX is launching a decentralized crypto exchange built on the Solana blockchain

Crypto exchange FTX, which currently offers spot and derivatives trading platforms, is launching a decentralized exchange (DEX) — but unlike many market entrants these days, it won't be based on Ethereum.

Called Serum, the DEX is built on the Solana blockchain, which is claimed by its designers and developers to be faster and cheaper than Ethereum, which currently plays home to the vast majority of decentralized finance (DeFi) applications. Solana is a Layer 1 network and claims to scale to nearly 56,000 transactions per second, whereas Ethereum's current capacity is about 15 transactions per second. As for cost, Solana says it processes transactions at an average $0.00001 as compared to Ethereum's average fee of $1.60 per transaction.

"Solana is awesome," FTX CEO Sam Bankman-Fried told The Block. "It is 10,000 times faster and 1,000,000 times cheaper than Ethereum."

The Solana-based Serum DEX will have the speed, cost and user experience (UX) of a centralized exchange "while being trustless and non-custodial," said Bankman-Fried, who said the target launch date will be in a "week or two." FTX has today also added support for Solana's SOL token.

Anatoly Yakovenko, the creator of Solana and president of the Solana Foundation, told The Block that Serum is the "first full-featured, decentralized exchange built on Solana" and that it is designed to compete with centralized exchanges "from day one."

The Serum launch comes during a period when the whole DeFi space is gaining traction, thanks to the "yield farming" craze, i.e., more people are trying to grab the highest token-generating yield from different DeFi protocols and projects. The DeFi market has hit over $3.6 billion in total value locked. DEX trading volumes also surpassed the $1.5 billion mark last month and are set to do the same for the month of July.

Today, more than 99% of crypto trading takes place on centralized exchanges, but the trend is shifting to DEXs at a faster pace, as The Block reported in May.  

ETH compatibility

That Serum is built on Solana raises the question of how it will implement Ethereum-based tokens.

Cross-blockchain compatibility has been cited as a major issue in the DeFi space. Trading assets from different blockchains on the same DEX is difficult because different blockchains have different consensus mechanisms, among other things. While there are DEXs that support cross-chain integrations through projects like WBTC (an Ethereum-based token pegged to Bitcoin), they rely on price oracles, or third-party services, to settle transactions.

Serum has no oracles, Bankman-Fried told The Block, adding that the DEX will offer trustless cross-chain trading — despite being built on Solana — because it is interoperable with Ethereum. While other DEXs have attempted to build cross-chain compatibility, Serum uses variants of Optimistic Rollups (a Layer 2 solution designed to support transaction scaling on Ethereum) to create cross-chain swaps and tokenization that are "completely trustless," said Bankman-Fried.

"The essence is that the Solana blockchain can be programmed such that, when fed a copy of another blockchain's history, it can verify that it is, in fact, valid," he said. "This basically lets Serum observe other chains and wait until one asset has been released to deliver its side. Furthermore, if both blockchains have smart contracts, they can validate each other, allowing atomic swaps."

'Not perfect'

Yet there is always a trade-off between scaling/throughput and decentralization, meaning Serum won't be as decentralized as a DEX built on Ethereum (e.g. Uniswap) — that is, not everyone can run a node.

Serum is not without its own challenges, Bankman-Fried acknowledged, telling The Block that the DEX "isn't perfect."

One challenge, he said, is that while Serum will be able to plug into Ethereum, it won't be natively built. This means that users will lose some of the speed advantages if they have to wait for their ERC-20 tokens to arrive.

Another challenge is that Solana's user base and network of apps aren't anywhere close to Ethereum's size. Indeed, there are more than 2,900 decentralized apps (dApps) on Ethereum, while its closest competitor, EOS, is home to 330 dApps, according to tracker State of the dApps. Solana is not listed on the tracker, but it counts six dApps within its ecosystem currently — Kin, Terra, Akash, Civic, DDEX, and Chainlink, according to its website.

Nonetheless, the key is to make a product "compelling enough" that users will give it a shot, said Bankman-Fried, referring to the experience with building FTX.

FTX has quickly grown to become one of the top spot and derivatives exchanges since its launch last year. FTX's spot platform is now ranked 23rd by trading volumes, and its derivatives platform is ranked 6th by open interest, according to CoinGecko. FTX currently has around 100,000 users across its platforms, Bankman-Fried told The Block.

Twin tokens for Serum

The Serum DEX is the brainchild of the Serum Foundation — which includes FTX and Alameda Research staff, as well as external partners and advisors. Around 20 people are working on the project, said Bankman-Fried.

Some of the partners include Multicoin Capital (an investor in Solana), Kyber Network, CoinGecko, Gauntlet Network and TomoChain. While the advisors include Compound's Robert Leshner and Calvin Liu, and TomoChain's Long Vuong, among others.

Serum has two native tokens in its ecosystem — Serum (SRM) and MegaSerum (MSRM). SRM will be a "limited governance token," said Bankman-Fried, meaning the token will be used to decide aspects such as fees but won't have the ability to "disrupt existing funds or markets."

MSRM will have similar utility, but in some cases, its holders would receive a bonus or larger fee discounts, according to Bankman-Fried. Both SRM and MSRM tokens are SPL tokens — which is Solana's standard equivalent of ERC-20 — and there are ERC-20 versions as well of the tokens.

"SRM is the backbone of the Serum ecosystem. MSRM is 1,000,000 SRM stacked together; it behaves as the sum of its parts, but also confers additional advantages (e.g. each node must have at least one MSRM). You can always convert MSRM into 1 million SRM, but you can only create MSRM if less than 1,000 currently exist," said Bankman-Fried. 

Customers were also allowed to buy MSRM in a private seed round, and about $7 million have been raised to date, said Bankman-Fried.