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Decentralized Exchanges Aren't Living Up to Their Name – And Data Proves It

Some say a “decentralized exchange” is an oxymoron. Perhaps not, but for now it’s not much more than an aspiration.

Over the past year, dozens of cryptocurrency trading platforms have marketed themselves as decentralized exchanges. While models vary, the term implies they allow users to trade on a peer-to-peer basis, and more importantly, without using a platform operated by a single entity.

The main selling point is that unlike today’s better-known crypto trading platforms (think Coinbase, Kraken or Binance), a decentralized exchange shouldn’t require traders to store their money with a third party that can be hacked. Yet while “DEX” has been a hot buzzword, it’s been unclear how decentralized they actually are.

Early indications, however, suggest they’re not living up to their name yet.

According to data collected exclusively for CoinDesk from July 2 to July 12 by the ethereum analytics firm Alethio, as well as interviews with market participants, what decentralized exchange models actually offer is a spectrum of technologies with varying degrees of centralization.

Some attempt to decentralize a traditional exchange company, such as the Huobi Chain Project announced in June, while others seek to build a community with stakeholders around a peer-to-peer model, like 0x.

“Decentralized exchanges are making headway toward the re-elimination of central parties in that [crypto trading] system,” said Wall Street veteran Jill Carlson.

But they still have quite a ways to go.

Alethio data analyzing DEXs from July 2-12.
Note: RadarRelay is a 0x relayer.

For example, Bancor was itself the only market maker on its decentralized platform, where it facilitated roughly 9,691 token swaps between 1,147 traders over the two-week period, Alethio found.

That lack of diversity compounds a problem with the “decentralized liquidity network,” highlighted by the steps Bancor took to address a recent $13.5 million hack. Specifically, Bancor’s freezing of funds, an action allowed by a mechanism in its code, prompted criticism that the platform was, for all intents and purposes, no different than its centralized predecessors.

“You’re not a ‘decentralized exchange’ if you’re taking away other people’s tokens whenever you want,” tweeted developer Udi Wertheimer.

Decentralized how?

One problem with talking about decentralization in this context is that it can be measured in different ways. An exchange platform might be highly centralized in one dimension but quite decentralized in others.

Take, for example, 0x. During the two weeks tracked by Alethio this open-source protocol that relies on independent relayers for token trading, had 914 market makers facilitating 9,017 trades by 234 traders – already head and shoulders above Bancor in the diversity-of-participants department.

However, those trades are funneled through a much smaller number (17) of “relayer startups.” Each relayer has its own business model, and the majority of them use their own proprietary software built on top of 0X, rather than purely open-source code that anyone can inspect.
And while 0x isn’t responsible for compliance with regulations, its relayers are. So it’s hard to call this type of DEX leaderless.

One of those relayers, Paradex, was acquired in May by Coinbase, a company that many in crypto would call the quintessential centralized exchange.

To be fair, though, it could be argued that the 0X ecosystem is arguably more decentralized than other exchanges in the way that counts the most.

“It’s different from a centralized exchange because these relayers are not holding user funds at all. They are completely non-custodial,” Amir Bandeali, CTO of 0x, told CoinDesk. “We have seen a lot of relayers starting to make open source market-making tools.”

For Carlson, who works as a consultant to 0x, the term “decentralized” should primarily apply to non-custodial trading platforms. As such, she believes hacks such as the Bancor theft point to the dangers of centralized custodians, telling CoinDesk:

“When we talk about decentralized exchanges, the primary threat that people are concerned about today is custody.”

Early days

Stepping back, it’s important to remember that the DEX market is in its infancy, and so the volume is still pretty low.

Indeed, among the DEX platforms analyzed by Alethio, the most popular was IDEX, an exchange developed by the fintech firm Aurora, which facilitated 69,339 swaps between 12,400 traders during the two-week period.

Compared to centralized Bitfinex, which facilitated roughly 92,024 trades in just two days, from July 9 and 10, according to CoinDesk’s analysis of its trade history, IDEX’s volume is a tiny drop in the niche bucket.

Marshall Swatt, founder of the institutional crypto asset exchange Swatt Exchange, argued that decentralized exchanges are merely “a fancy form” of over-the-counter (OTC) trading that won’t be able to scale. He told CoinDesk:

“I just think the lack of fiat on-ramps, the lack of governance, and the lack of compliance, are going to relegate decentralized exchanges to the margins.”

Swatt, who previously co-founded the New York bitcoin exchange Coinsetter then sold it to Kraken in 2016, warned against underestimating the difficulty of managing compliance, security, and customer support, business departments that may not fit bitcoin’s grassroots model.

“You’ll never have the level of liquidity because it will never attract the algorithmic traders,” he said.

Indeed, most DEX models only allow users to swap one cryptocurrency for another, which keeps newcomers to crypto, whether they be institutional investors or first-time buyers, at bay.

Carlson agreed it’s hard to imagine decentralized order books, market makers, or know-your-customer identity checks. These are all core pillars of most popular exchanges.

However, in her view, it’s an oversimplification to say DEX is merely glorified OTC.

“The difference here, at least today, lies at the settlement level, not at the execution level,” Carlson said, speaking to how some DEXs allow P2P settlement without third party oversight or custody. “What you end up with is an experience that is disintermediated.”

DEX fever

Indeed, none of the shortcomings of current decentralized exchanges have quelled the DEX fervor sweeping the industry.

Speaking to the Paradex acquisition, Scalar Capital co-founder Linda Xie, a Coinbase alum turned hedge fund manager and 0X advisor, told CoinDesk demand for non-custodial P2P platforms could inspire centralized incumbents to offer DEX options as well.

Indeed, Bloomberg reported the long-established exchange Binance wants to “decentralize” itself. So does the legacy platform provider Huobi, which announced in June it’s offering roughly $166 million to a fund for contributors to the upcoming Huobi Chain Project, which aims to establish a decentralized autonomous organization (DAO) and eventually incorporate parts of Huobi’s exchange.

“We’re not 100 percent sure if a corporation can be 100 percent autonomous,” Gordon Chen, Huobi Chain Project’s executive leader, told Coindesk. “We’re not sure if it can be 100 percent decentralized either. But we believe there can be some kind of balance in between.”

Although granting businesses more sway than users on Huobi’s voter-driven exchange HADAX sparked backlash, a few hundred people already applied to build the project’s public blockchain.

Along those same lines, Bancor co-founder Eyal Hertzog tweeted that his project is also on a “pathway to decentralization.”

Alethio’s data suggests that so far platforms with more straightforward P2P models have achieved more diversity of participants, even if they have so far gained less traction. For example, during this two-week period in July the startup AirSwap, which operates almost like a Craigslist for ethereum tokens, facilitated 695 swaps between 216 traders with the help of 60 unique market makers.

Such potential is why Xie remains optimistic about the prospect of DEXs, saying: “This is still just the start.”

Agreeing with Xie’s point, Carlson said the wide range of models offer a promising starting point for the further decentralization of trading platforms, concluding:

“All aspects of the spectrum have an important role to play.”

Man in maze image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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$13.5 Million Hack Ignites Fresh Debate Over Crypto Project Bancor

Innovation is never easy. That said, sometimes it can be that much harder.

Such was the case for crypto project Bancor this week, which saw its design decisions and strategy picked apart on social media as it sought to contain the damage from a multimillion-dollar hack.

On Monday, the project announced its app was down for maintenance, and shortly after, it revealed a security breach had taken place. At the time, the project assured no user wallets were compromised. (The startup has since brought its platform back online.)

Then on Tuesday morning, Bancor published details of the breach: a wallet used to upgrade smart contracts was compromised and used to steal 3.2 million of the platform’s own BNT tokens (worth $10 million), 25,000 ETH (about $12.5 million) and 230 million NPXS tokens ($1 million). Perhaps most notably, Bancor said it had frozen BNT tokens to prevent their loss.

Some background: it was Bancor that raised a then-record-breaking $153 million in a token sale, which saw participation from investors like Tim Draper and the investment firm Blockchain Capital. The startup pitched itself as a kind of “decentralized” market maker for smaller cryptocurrencies and crypto-assets, as well as means to create wholly new tokens.

As an early mover in using the initial coin offering (ICO) funding model, Bancor has long been a magnet for critiques.

Critics have alleged everything from that the platform is unnecessary to that it doesn’t need a blockchain. Sparking discussion of these topics this time around is a crucial detail above: that Bancor was able to quickly stem losses in the cryptocurrency it created and issued.

Included in the Bancor code is a mechanism that allows the company the ability to freeze movements of the BNT token – something that critics quickly pounced on as the antithesis of the “decentralization” mantra, by which a network wouldn’t have one governing force.

Bancor has frequently been referred to as a “decentralized exchange,” a moniker that added fuel to those arguments.

Backdoor blues

Some were more detailed in their critiques, though, including developer Udi Wertheimer who reminded to the community that the centralization issue was well known long ago – and criticized.

On June 20 of last year, Wertheimer wrote in a Medium post that both Bancor’s token and ICO contracts allow Bancor to arbitrarily issue, freeze and even destroy any BNT tokens whenever they want.

“I trust that Bancor’s team won’t try to misuse this backdoor. However, having so much power concentrated centrally, creates a potential single point of failure. The keys held by the team could be stolen for example. Or, law enforcement could force the project to freeze or destroy tokens if they realize this is possible (and if for some reason they would suspect any wrongdoing),” Wertheimer wrote at the time.

Back then, the Bancor’s team responded to the critique saying that the danger of the team losing its key is “quite far-fetched,” as they are keeping the keys securely, using multi-sig contracts and offline wallets.

As might be expected, that pledge was brought up in the wake of the hack.

Wertheimer further argued that such “backdoor” mechanisms that undermine the decentralization principles in Bancor could also cause the current breach, as the compromised wallet existed for the purpose of upgrading smart contracts – another feature allowing Bancor to manage the network in a more centralized manner.

Voices of support

Critiques aside, not everyone on social media took aim at Bancor.

Indeed, some took to social media to back Bancor’s efforts to build their platform in the face of such issues.

One observer suggested that those criticizing Bancor might feel differently if it was their funds at risk following a hack.

Bancor response

Still, the company persevered through the tough week.

Following the attack, it has issued a number of statements seeking to clarify its actions, including its ability to exert control of the BNT tokens.

Stressing once again that user funds weren’t compromised, Bancor said that the funds were stolen out of a BNT’s connector balance that served as a reserve, and smart contracts accessed by that wallet.

Bancor also defended its decision and ability to freeze BNT tokes as “necessary to protect the network and token holder in a state of emergency:

Later, in a July 12 blog post entitled “The Road Ahead,” co-founder Guy Benartzi didn’t address the decentralization critiques but outlined how Bancor would make available its internal tools to assist in tracking the stolen funds.

“This incident, while troubling, will not divert us from our goals. If anything, we will now redouble our efforts and accelerate our roadmap so that criminals will not prevent Bancor and the industry from achieving our most important of missions — to enable freedom of currency,” he wrote.

USB stick image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Bancor Creates Crime-fighting ‘Crypto Defenders’ as Scorn Over $12 Mln Hack Escalates

Self-styled “decentralized” exchange platform Bancor pledged to tackle cybercrime threats to cryptocurrency entities in a blog post July 12 as it resumed operations following a $12 mln hack this week.

Summarizing the platform’s future plans in the post, co-founder Guy Benartzi also announced that Bancor’s internal tools that helped tracked its hacked funds would be made available to a wider audience.

This move will form a precursor to a major crime-fighting initiative which Benartzi hopes will result in contribution of “resources and capabilities to fight criminals together.”

The initiative, described as a “coalition of crypto defenders,” will involve the platform and other as yet unnamed cryptocurrency industry businesses. Benartzi explained in the post:

“Members will collaborate on mechanisms to warn and assist each other in times of peril, coordinate around shared blacklists, and contribute open-source tools aimed at creating a safer world for all stakeholders.”

Bancor’s handling of the hack drew criticism from well-known industry figures and community members. The platform’s freezing of a smart contract containing almost $11 mln in its native token BNT runs contrary to decentralized principles, critics argued, while others claimed the fact that the attack was successful at all proved Bancor’s inferiority.

“An exchange is not decentralized if it can lose customer funds OR if it can freeze customer funds. Bancor can do BOTH. It’s a false sense of decentralization,” Litecoin co-founder Charlie Lee wrote on Twitter July 9.

Lee subsequently focused attention on Bitcoin and Litecoin’s Lightning Network implementation, which he said would eventually be the “ultimate” decentralized exchange arena.

Other commentators were less reserved, trader Tone Vays calling Bancor an “ICO scam” and Bitcoin developer Udi Wertheimer describing claims user funds were safe as a “meme.”

“Users funds aren’t safe,” he continued on Twitter, adding:

“The stolen 25,000 ETH belong to BNT holders. They were stolen from a reserve managed by a smart contract to fund BNT liquidity, and they were put there by BNT token buyers.”

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Bancor Urges Industry Players to Collaborate After $23.5 Million Hack

On July 9, the decentralized crypto platform Bancor was compromised. The hackers managed to drain over $23 million worth of crypto, part of which has allegedly already been converted into fiat via the instant exchange service Changelly. While the Bancor team is collaborating with other industry players to track the stolen funds, the recent security breach shows how decentralized platforms deal with security breaches, even though some community members have started to question whether Bancor can be considered a decentralized service at all.

What is Bancor?

Bancor was launched in June 2017 after one of the most successful Initial Coin Offerings (ICOs) in history: It gathered around $153 million in Ethereum (ETH) in just three hours during the crowdfunding stage backed by renown investor Tim Draper, among others. Named after a supranational currency conceptualized by economists John Maynard Keynes and E. F. Schumacher aimed to be used for international trade after World War II, the Tel Aviv-based Bancor is a decentralized cryptocurrency platform that essentially allows users to launch their own tokens.

In more detail, the Bancor protocol enables users to issue so-called “smart tokens,” which can hold one or more tokens in reserve and convert them into other tokens with no counterparty. Bancor integrates its own self-titled token (BNT), which can be traded for any of the other tokens supported by the network, and vice versa.

Thus, the smart token contract is its own market maker. As a result, it automatically provides price discovery and liquidity to other coins. In other words, Bancor is an outlet for selling any digital tokens it lists, even if there is no available buyer for them. It is a decentralized system, and, therefore, does not require KYC procedures and — unlike centralized crypto-trading platforms that recently attracted the harsh criticism of ETH creator Vitalik Buterin, who went as far as to wish them to “burn in hell forever” — does not store all user funds in one place, which potentially might attract hackers.

How did it get hacked?

Nevertheless, on July 9, it became subject to a heist, during which the hackers managed to steal roughly $23.5 million worth of crypto — 3,200,000 BNT (worth $10 million), 24,984 ETH (worth approximately $12.5 million) and 229,356,645 NPXS (worth roughly $1 million). The Bancor team confirmed the theft on its Twitter and swiftly froze the stolen BNT tokens, as such an ability was built into the Bancor protocol “to be used in an extreme situation to recover from a security breach,” limiting the total damage to approximately $13.5 million.

As to what caused the attack to be so successful, Bancor team reported the morning of July 9 that “a wallet used to upgrade some smart contracts was compromised.” All operations were halted, and the platform went offline — Bancor representatives assured Cointelegraph that the service will be up within 24 hours, around 10 hours ago. The platform has also reassured that “no user wallets have been compromised in the attack.”

The heist provoked some community members to question if the platform can be seen as decentralized at all. For instance, Charlie Lee, the creator of Litecoin, wrote on his Twitter:

“A Bancor wallet got hacked and that wallet has the ability to steal coins out of their own smart contracts. An exchange is not decentralized if it can lose customer funds OR if it can freeze customer funds. Bancor can do BOTH. It’s a false sense of decentralization.”

Community collaboration as the key to dealing with hacks

Now, Bancor hopes to track the stolen funds, part of which have been exchanged via the instant conversion service Changelly, as CEO Konstantin Gladych told Cointelegraph in an elaborating statement:

“Afterward, the tokens were frozen by the Bancor Foundation in our contract. Now we are helping track the stolen funds.”

Moreover, Bancor’s head of communications, Nate Hindman, informed Cointelegraph that the service is coordinating with a number of industry players to come up with tools and technology that would help the industry cooperate more effectively when hacks occur:

“These mechanisms include a real-time blacklist that tracks offending addresses and stolen assets, as well as an emergency fund that compensates projects when thefts occur. There is plenty more to do here and we look forward to working with our peers across the industry to make everyone stronger and smarter as we move forward together. Collaboration is not just a concept, it’s a practice — and we are grateful for the support and assistance.”

When asked whether it is possible to completely prevent these kinds of security breaches, Hindman argued that hacker attacks are becoming more sophisticated — along with the industry, however. Hindman also stressed that crypto platforms can outmaneuver hackers through collaborative effort:

“Together we stand in our efforts to create better tools that prevent thieves from committing crimes and utilizing stolen funds, and better processes for analyzing situations and informing users and relevant parties when they occur.”

Meanwhile, the BNT token is down 15 percent, trading for $2.43, according to

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Here Is Why Tron’s (TRX) Price Drop Is Only Temporary

The cryptocurrency markets have lost a staggering $20 Billion in the last 24 hours. The total market capitalization of the crypto markets stood at $273 Billion only yesterday; now it is valued at $253 Billion. The King of Crypto, Bitcoin (BTC), has somewhat held its own with a drop of 6% in the same time period and now trading at $6,392. BTC has since increased its market dominance to 43.2% as more traders prefer BTC in times of turmoil.

It is with the latter act of preferring BTC that the price of Tron (TRX) has also been dealt a major blow in the last 24 hours. TRX has lost 9.5% of its value in 24 hours and is currently trading at $0.033.

However, this is only temporary.

Initial reports indicate that the loss in market value has come as a direct effect of the Bancor Exchange hack that has resulted in the loss of digital assets worth $23.5 Million. The crypto market reaction follows a similar trend after the last 3 hacks (Coincheck, Coinrail and Bithumb) were announced in the crypto verse. What then proceeded, is a market recovery only a few days later. Therefore, all the TRX HODLers have to do, is to keep holding their TRX.

Another reason why the value of TRX will not be so low for too long, is that Binance plans on resuming withdrawals and deposits on the exchange sometime this week. This means that TRX holders can now move their TRX around to their wallets and cold storage thus decreasing the circulating supply available for trading. The influx of TRX into exchanges for the token migration, was a contributing factor for the decline in value of TRX by increasing the supply in exchanges whereas the demand was low.

Thirdly, the Tron MainNet has been working flawlessly since the Genesis Block was released on the Tron Independence Day. With a capability of 2,000 transactions per second, it is only a matter of time before the Tron Network decentralizes the web as well as the entertainment industry. Ethereum World News had earlier hinted that the Adult Film industry might be willing to tap into the Tron Blockchain and offer DApps for its viewers.

In conclusion, the current price decline of TRX is temporary due to the Bancor hack as well as the lack of liquidity of TRX from the numerous exchanges still facilitating the token migration. Once that is done, and the market recovers after the hack, it is all systems go for an increment in the value of TRX.

Disclaimer: This article is not meant to give financial advice. It is an opinion piece. The opinion herein should be taken as is. Please carry out your own research before investing in any of the numerous cryptocurrencies available.


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Hackers Steal $23.5 Million From Decentralized Cryptocurrency Exchange Platform Bancor

Bancor, a decentralized cryptocurrency exchange project has become the latest victim of cryptocurrency hackers. The company announced on Monday (July 9, 2018) that it experienced a security breach forcing it to shut down its operations. Bancor was one of the high profile ICOs of 2017, raking in $153 million during its token sale event.

Details of the Hack

Issues began yesterday when the platform announced a security breach. A few hours later, Bancor released a follow-up statement revealing that suspected hackers had stolen $12.5 million in ETH. The hackers also took BNT and NPXS tokens to the combined tune of $11m making the total loss to be $23.5 million.

According to the Bancor, the breach came via an online wallet being used to effect upgrades to certain smart contracts. The hackers were able to gain control of the wallet using it to siphon the stolen coins.

The Bancor team also announced that they were able to freeze the stolen BNT tokens – BNT is the native token of the Bancor platform. However, there is no way to freeze the stolen ETH and NPXS. Thus, the company plans to work in tandem with other exchange platforms in tracing the stolen ETH and preventing the cybercriminals from liquidating them.

Effect on the Bancor Cryptocurrency Price

Since the news of the hack became public, BNT token price has taken a significant tumble. At the start of yesterday’s trading, the BNT price was $3.15. By the end of the day, the price fell to $2.50. The decline has continued into its second day, today (July 10, 2018), dropping to $2.45. BNT has lost more than 20 percent since the attack.

The theft is yet another snag in the Bancor project development roadmap. Despite its fundamental premise and the successful ICO, the project has many doubters. Bancor is a decentralized exchange platform that employs a fluctuating price system for selling virtual coins even when there is no demand.

In 2017, Kyle Samani of Multicoin Capital said that Bancor didn’t provide any utility for the market. According to him, if exchanges decline to list any token, it is because that token isn’t good enough. He summarized his critique of the Bancor project thus:

For assets that actually have value, there will be a market. For assets that people don’t want to buy. Why should there be some pity-based programmatic market maker to provide liquidity? My inner capitalist is just dumbfounded by the concept of Bancor.

Will this latest hack adversely affect the prices of cryptocurrencies, especially Ether? Does this hack show that decentralized exchanges are just as vulnerable as their centralized counterparts? Keep the conversation going in the comment section below.

Image courtesy of Coinmarketcap.


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Token Platform Bancor Goes Offline Following 'Security Breach'

Token creation platform Bancor has gone offline following a “security breach” that took place Monday morning.

Bancor posted on Twitter that it took its platform offline following the security incident, stating that “no user wallets were compromised.”

“To complete the investigation, we have moved to maintenance and will be releasing a more detailed report shortly. We look forward to being back online as soon as possible.” A spokesperson for Bancor confirmed the incident when reached by email.

The developments come more than a year after Bancor raised $153 million in an initial coin offering (ICO), representing the largest token sale of its kind at the time (a figure that was ultimately eclipsed by Telegram and, later, EOS). In addition to serving as a decentralized exchange, Bancor also allows for the creation of new cryptographic tokens.

While the startup stressed that no user wallets were impacted, social media chatter suggests that funds connected to the platform may have been compromised in the incident. At least one observer has claimed that as much as 25,000 ETH – an amount worth roughly $12 million – was moved out from Bancor addresses.

A representative for Bancor didn’t immediately respond to questions regarding the veracity of those claims or when the platform would be brought back online.

Questions aside, the incident appears to have impacted the price of Bancor’s BNT token. According to CoinMarketCap, the token’s price is down roughly 14 percent during the past day and is currently trading at around $2.73.

Bancor Cryptocurrency image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Bancor Launches Community Token Network to Combat Poverty in Kenya

Bancor is launching a network of blockchain-based community currencies in Kenya aimed at combating poverty, according to a press release shared with Cointelegraph June 18.

Bancor, self-described as a “decentralized liquidity network,” secured a then-unprecedented $153 million in under three hours in an Initial Coin Offering (ICO) June 2017. As of press time, it is the world’s largest decentralized crypto exchange with almost $1.6 million in trade volume, according to data from CoinMarketCap.

The company’s new project seeks to stimulate local and regional commerce and peer-to-peer activity by enabling Kenyan communities to create and manage their own digital tokens.

To oversee the launch, Bancor has partnered with a non-profit foundation, Grassroots Economics, which currently runs community currency programs in six locations across Kenya, and serves over 20 schools and 1,000 local businesses.

Grassroots will use the Bancor Protocol to expand its existing paper currency system into a blockchain-based network. The new tokens will be tradable using fiat or crypto on the Bancor platform, which the organization hopes will allow global users to support local communities from afar.

User-generated cryptocurrencies will be interchangeable for one another with no counterparty involvement. A balance in a stabilized “parent” token is under development and will be initially pegged to the Kenyan Shilling to enable convertibility between the network of local currencies.

The first pilots from the project are planned to launch in two economically disenfranchised regions of Kenya, Kawangware and Kibera.

Decentralized exchanges such as Bancor exclude a middleman and the need to rely on a third party service to hold customers’ funds. Their trading mechanisms are based on smart contracts and atomic swaps.

In Bancor’s case, its protocol is implemented using multiple contracts involving a token converter and an ERC-20 compliant SmartToken. SmartToken users can hold one or more tokens or cryptocurrencies in reserve, using a smart contract to automate their transactions.

Bancor is seeding the initial currencies by contributing capital generated from its $153 mln token sale in June 2017.

Blockchain’s potential to underpin a fairer and more equitable society has been recognized by leading world organizations, including the United Nations, who used the Ethereum network to distribute aid to Syrian refugees in 2017.

The World Bank’s Findex 2018 report indicates that 3 bln people globally are underbanked, showing that in the developing world over the past three years, savings have declined, credit has gone flat, and resilience has gone down.

As of press time, Bancor (BNT) is trading at $3.27, slightly down from the time of its ICO sale price of $3.92.

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Decentralized Exchanges, Off-Chain Atomic Swaps, And A Brief Look Into The Future

The views expressed here are the author’s own and do not necessarily represent the views of

For an economy that emphasizes decentralization, cryptocurrency has ironically relied primarily on centralized platforms of exchange. This is problematic as they often hold funds in giant “honeypot” addresses that attract sophisticated attackers. This has resulted in several cases where exchange funds have been drained. In fact, there were two in the past 3 months alone! Bitgrail reported on Feb.12 that over $170 mln in XRB was stolen from their wallets. Coincheck suffered one of the largest losses ever with over $400 mln in NEM being stolen.

Decentralized Exchanges

Fortunately, alternative solutions to centralized exchanges are available and are called decentralized exchanges (DEXs). These platforms are structured in such a way that users retain ownership of their coins with their private keys. This is a much-needed solution because it prevents cryptocurrencies from being accumulated into one centralized point of attack.

The demand for DEXs are growing. For example, the Radar Relay exchange exceeded $1 mln in volume over a 24 hour period for the first time back in the beginning of January.

But even this type of exchange is not without its limitations – they are liquid and front-running.


The way decentralized exchanges work is that people individually set and take orders. However, these orders exist on separate order books that are hosted independently of each other. Therefore, the orders placed on one book won’t appear on another. This creates an issue as users suffer from a lack of liquidity and may have to look at several different books to place their orders.  

This can be fairly solved through a process called “Networked Liquidity.” The basic premise is that different order books utilize an API in order to share their orders with one another. In this way, orders flow between “relayers” and provide the needed liquidity in the network.  

Networked Liquidity With Trade Execution

Front running

Front running is the concept that people can outbid an order placed on a DEX. Many decentralized exchanges running on Ethereum rely on smart contracts. But because the network is a public Blockchain, this creates a problem as anyone can check the memory pool to see who is intending to take an order.  

Once a bad actor identifies that an order has been placed on a DEX, they can simply jump in front of them by placing the same order except with more gas. Therefore the first order that was

placed is never realized as the order is now gone from the book.  

Front Running

One solution that Ivan Bogatyy, a former Software Engineer at Google, suggested to the Bancor team in his blog is to implement a ‘minReturn’ on trades which effectively cancels the order once the user realizes someone is trying to cut in front of them. Another solution he suggested was to set a max gas price so that people can’t bid higher than the limit.

But these are short-term fixes. Adding a minReturn doesn’t prevent front-running – it just cuts a user’s losses. Further, adding a gas limit isn’t ideal during a congested network.

Another way to mitigate this issue is through a “Commit-Reveal Scheme,” a solution presented by Will Warren, co-founder of the 0x project, an open protocol for decentralized exchanges. This means that a trader secretly commits his funds with a transaction, but doesn’t reveal it. Once the transaction is mined, a second transaction is sent with all the details – therefore executing the order on the DEX.  

Unfortunately, this method isn’t perfect as it doesn’t prevent accidental collisions, for example when two of the same orders placed at the same time.

Off-Chain Atomic Swaps

Atomic Swap

On March 15, 2018, Lightning Labs announced the first Lightning beta release for mainnet on both Bitcoin and Litecoin. One of the most anticipated applications of the Lightning Network (LN) is Atomic Swaps.

Atomic Swaps describes the “all or nothing” exchange of one currency for another, for example, Bitcoin for Litecoin. Even though the LN is not needed, it would make Atomic Swaps instantaneous, private, and fee-less in regards to mining.

Let’s take a look at how the LN stacks up against the problem of liquidity and front running that DEXs face.


There are two generally understood paths to perform Atomic Swaps on the LN, although alternative ways are being researched: directly from one LN node to another LN node and routing your swap through an intermediary.

In regards to liquidity, one issue the LN may face is fund and channel availability. The very nature of the network requires users to create payment channels through multisigs. This means you can only get on the LN channel if you have something to spend. Alternatively, intermediaries can only route payments if they have a sufficient amount of funds.  

This issue can be solved in a similar way to DEXs. Just like how DEXs order books can share their information with one another, so too can transactions be routed and shared between nodes that have the funds and the channels to perform the swap. All that would be required is to extend the number of “hops” your swap goes through. As of press time, this is a challenge as the LN is still in its early development stage with more and more channels and funds being added to it. But as the network grows and larger players come online, this will be less of an issue.

Front running

Atomic Swaps utilize a technique called Hash Time Locked Contracts (HTLC). By simultaneously submitting both currencies into these contracts, HTLCs ensure that the amount you are exchanging for is ensured and cannot be “outbid” as they can be on DEXs. Similarly, there is no danger of “accidental collision.”

Hashed Timelock Contract

For example, if I would like to exchange my Litecoin for Bitcoin, I would need to find someone on the LN to exchange with. We then commit respective coins to the swap. These are then routed through other nodes if we need other connection points and don’t want to pay for fees to create two payment channels between us. In this way, the exchange is guaranteed.  

The LN does face a different problem: bad actors may try to cheat or steal another person’s funds. However, severe punishing contracts have been designed in such a way so as to disincentivize anyone from doing so.

Looking forward

Currently, many DEXs serve an important role in providing a way for the cryptocurrency ecosystem to trade without relying on centralized exchanges and removing the enormous financial incentives for sophisticated attackers. At the same time, they almost exclusively serve Ethereum based tokens.

Alternatively, Atomic Swaps have yet to be widely implemented as the LN is still growing. It will also be limited to the currencies which are LN compatible.  

Taking these facts into consideration, it may appear that the two forms of exchange will develop independently of one another as they serve different ecosystems. Still, this may not always be the case. It’s possible that these two ecosystems may eventually become compatible with one another. Alex Bosworth, a LN developer, recently shared in a podcast that one of his goals is to enable Atomic Swap compatibility between as many coins as possible. This would include the exchange of ERC20 tokens and LN compatible currencies.  

Perfect Future?

Overall, the future of cryptocurrency exchanges seems to be bright as they are continually evolving. How we trade now may seem like a relic of the past in the next 5 to 10 years. The hope is that the developmental trend will continue down the path that is reflective of the principles of the coins they are hosting; by emphasizing censorship resistance and decentralization.

The article is written by ecurrencyhodler, an author of “Understanding Litecoin: The Digital Currency for Payments.”