The battle of the Asian exchanges: DEX or doom?

$1.4 billion. That’s how much thieves have stolen in total from third-party crypto exchanges, according to research by The Block in February. Not to mention the QuadrigaCX debacle.

It should come as no surprise then that allowing users to secure their assets while trading is an important differentiator for exchanges. That’s where DEXs - or decentralised exchanges - have started to be of interest; essentially, dApps that allow for peer-to-peer trading and provide liquidity; making them hack-proof. This includes the likes of 0x, IDEX, and Kyber Network, with most built on the Ethereum, EOS, or NEO blockchains.

Although DEXs haven't had serious traction yet (volumes are currently very low), they could, in theory, be a competitor to centralised exchanges. And it looks like traditional exchanges are starting to wise up by investing heavily in their own solutions, in particular, Binance, which until now has been the only major Asia-based provider to launch a DEX testnet. 

But Hong Kong-based exchange Kucoin is taking a different approach, announcing Tuesday it has gone live with the Arwen protocol. In short, this lets users open escrows when completing a trade so that if it is hacked, the online coins can be recovered (if the escrow is closed before the expiry time). There's a proportional fee each time users ask the exchange to fund an escrow, but the user's coins which go in the escrow are never traded away; they just serve as collateral. As such, the exchange just pockets the interest on the escrowed holdings.

Arwen is the Boston-based startup that designed the software. The company is hoping it has found a way to allow users to trade on centralized exchanges without having to give up user controlled custody of coins while trading. Co-founded in 2017 by Boston University cryptography professor Sharon Goldberg and her former student Ethan Heilman, it’s the first time a major exchange will test a beta version of their work. Kucoin’s president Eric Don noted that the firm “will be able to offer a better trading experience than most DEXs” as a result.

Still, it’s not an exclusive partnership, and Arwen has confirmed it is already in conversations with other unnamed major players in the Asian market. This could include the likes of Bitfinex, Bitflyer, Bittrex, OkCoin, and Huobi; although none have publicly expressed plans to integrate a DEX solution.

Binance did not respond to a request for comment about what this means for the DEX space and its own prominence.

DEX vs hybrid?

So could the Kucoin x Arwen collaboration be the new model for decentralisation? It’s too early to know how users will respond to their need to open escrows, the fee for which is 1 basis point per day, or 1/24 basis point per hour, of the total value in escrow.

Meanwhile, Kucoin’s CEO Michael Gan said its partnership with Arwen was a “first step,” noting that the exchange has a wider “scheme of developing our own decentralized exchange.” [related id="1"]

OkEx, a smaller exchange, also seems committed to building a full DEX, which is in the pipeline with an update on its development due in Q3.

"We have to try, we have to do it," OkEx's Head of Operations Andy Cheung told The Block. He added they hadn't decided yet whether in the future they would have two separate exchanges - one centralised, another decentralised - or would eventually merge them. "Even Binance hasn't decided," he noted.

Another thing to consider is that Arwen really only targets users already thinking seriously about security, with the desired audience being those with existing private keys, which can be tricky. Having said that, to interact with a DEX, users need a private wallet too and most likely a meta mask connection as well.

Notably, Max Pertsovskiy, COO of Waves, a platform which hosts its own DEX, voiced his support for Kucoin's "hybrid" model. "Crypto traders need a platform which can protect their personal data and assets whilst providing a user-friendly experience. As a result, DEXs need to combine the security of peer-to-peer technology with the speed of centralised systems. I would love to see all the users and all the liquidity moving to DEXs but it’s still a long way off," he said. "Maybe projects from big players like Kucoin will make a change."

Arwen’s Sharon Goldberg also added that their solution is more attractive overall, as “trading is centralized while settlement is trustless and decentralized.”

“Everything has gone in the peer-to-peer direction, which we chose not to do because of all the constraints such as speed limitations of blockchains and lack of liquidity,” she said.

As for attracting exchanges to partner with, Arwen is betting on them wanting to reduce their security risks and to reassure users by offering self-custody. And it seems they’re on their way to doing so.