Cryptocurrency exchanges are quite exclusive when it comes to investment capital. Since these crypto exchanges are largely not regulated it prevents traditional financial institutions getting involved in cryptocurrencies. Also, most leading crypto-exchanges do not accept fiat currency directly. As most exchanges are centralized, transactions are recorded on their private ledgers.

The Legolas Exchange aims to change all of this by creating an exchange which is part-decentralized and allows you to trade keeping your own private keys safe via a partnership with Ledger. Legolas is aiming to be the go-to exchange for institutional investors who may be wary of using less secure and unregulated exchanges along with accepting large fiat transfers and also providing their own token which will be used for paying all fees on the exchange.

How Will Legolas Accept Fiat Currency?

Other leading cryptocurrency exchanges, like Shapeshift and Poloniex do not accept fiat. Legolas has partnered with an investment house called Makor Capital. This is a very reputable, global brokerage company. The company is regulated by financial institutions. This often raises an eyebrow in the crypto community but it is also the way to drive more widespread adoption in traditional financial markets.

With the Makor involvement, this means traders can deposit physical fiat cash at any of the affiliated bank branches. Markor also has access to a whole network of financial institutions. In this sense, Legolas wants to be the leading innovator when it comes to security and compliance for all crypto exchanges. Existing exchanges also have problems that need to be addressed.

What Are The Problems With Existing Crypto Exchanges?

With cryptocurrency being a rather new and developing field, customers are forced to use the limited amount of exchanges that exist. A major concern for most customers is security. The infamous Mt. Gox hack of 2011 is currently making headlines again for reportedly driving the price of Bitcoin down. In the hack the exchange apparently lost 7% of all bitcoins in existence, worth around $473 million at the time.

Exchanges also rely on weak authentication methods. Even two factor authentication (2FA) layer of security is susceptible to phishing. Using an exchange also requires the user to trust the exchange. Forums and blogs on the web are full of complaints of users who have been locked out of their funds and are at the mercy of the exchanges to respond.

Who Will Legolas Keep Users Safe?

Simple login access with only a username and password will not be allowed on Legolas. It will not allow weak 2FA apps like Google Authenticator or Authy. It will enforce a secure 2FA authentication protocol FIDO U2F. This protocol was created by Google and Yubico. It is an open authentication standard. This means the user has to authorize transactions with a Ledger hardware wallet device.

Instead of a 2FA passkey the user inserts the Ledger wallet into the computer via USB and presses a button on the device to authenticate the transaction. The Legolas site mentions a “smart card wallet based hardware wallet”. Currently Ledger does not offer a smart card hardware wallet so I assume it will be a custom product and use (near-field communication) NFC to communicate with mobile devices.

What If Clients Lose Their Ledger Wallet?

The Legolas team have already thought of this. The client’s Legolas wallet will be a multi-signature (multisig) wallet. This ensure that two of three parties need to authenticate the transaction – the Legolas exchange when the user logs in and then their Ledger device when they authenticate for the second time. If they lose their Ledger wallet device for some reason there is a third hardware copy kept in a Ledger wallet in a bank safe that can be retrieved to unlock the funds.

What Gives Legolas An Advantage Above Other Exchanges?

Legolas has a clever solution to prevent front running. It is the unethical practice of trading on advanced knowledge. It is similar to insider trading. Brokers can rearrange orders to benefit themselves placing their own orders ahead of pending market orders. Crypto exchanges are positioned the best to benefit from this practice. They can buy a cryptocurrency for themselves quickly and secretly before any large buy orders are executed and then sell the crypto at a large profit immediately after the order has pushed prices up. The trader also ends up paying more for their transaction and the exchange gains a profit. The fact that the order book is hidden is a major hindrance to recruit new investors.

How Does Legolas Prevent Front Running?

The immutable nature of the blockchain can be used to lock transactions in the correct order. Each order is given a timestamp and is encrypted and sent to the blockchain. When blocks are confirmed the order sequence is etched into the blockchain. It becomes impossible to insert orders or modify the position of orders. The private key of each order is publicly available in the blockchain. This makes the order process fair and transparent.

How Are Orders Matched?

Orders are matched off-chain. This prevents the Ethereum blockchain from more congestion. It also increases throughput which means more transactions can be executed than the Ethereum blockchain could accommodate.

What Blockchain Does Legolas Use?

The great idea behind the Legolas Exchange is that it should be ledger agnostic thus it can be easily integrated with any blockchain. The beta version of Legolas will interface with the Ethereum blockchain. For the live version the team is looking for the best possible blockchain. They are currently researching a particular system known as the Byzantine Fault Tolerant.

Is The Legolas Exchange Decentralized?

It aims to be a hybrid of both centralized and decentralized technologies. Decentralized computing uses a lot of energy. Centralization can be used off-chain to increase transaction speed and cost. Instead of having a private, centralized ledger for all transactions, the Legolas Exchange will use a decentralized ledger to create transparency. It will lead to greater trust. Anyone can view the account balance or transaction history of anyone.

Are All Transaction Executed On The Public Ethereum Blockchain?

No. To increase speed and performance the exchange will use its own Order Pool System. Instead of sending separate orders to the blockchain the Order Pool will send a single hash of all the orders to the blockchain. This means only one hash code is sent to the blockchain per block. Furthermore it creates the possibility for an unlimited amount of orders per block. This also the Ethereum network to scale beyond its current capabilities. This sidechain will use the LGO token.

What is The LGO Token?

As with other Ethereum-based tokens, LGO is an ERC-20 token that is compatible with the Ethereum blockchain. It is the transfer of value on the Legolas Exchange. Unlike other exchanges, Legolas will not charge any fees in cryptocurrencies other than its own LGO token. In order to increase the value of the LGO token, the exchange has an interesting implementation.

How Will Legolas Increase The Value Of The LGO Token?

In keeping with deflationary models of cryptocurrency Legolas aims to reduce the supply of the LGO token in their holdings. For every trade that happens on the exchange, Legolas will destroy 25% of the transaction fees they receive. This will be transparent and users will be able to verify this. In this way, the supply of LGO decreases while transactions on the exchange increases. This creates a greater demand for the LGO tokens and should push up the prices using the law of supply and demand.

How Can You Buy LGO Tokens?

You can buy Ethereum… Ethereum (ETH) is currently being used in the first phase of the exchange. Since it is an ERC-20 token, the LGO cryptocurrency will be immediately available to exchange on decentralized exchanges. According to the website’s FAQ section they are still negotiating with centralized exchanges to list LGO and will communicate when the token is listed.

At the time of writing, LGO is available to trade on the IDEX exchange.

Rewards for Hodlers

Another thing to note about the LGO token is that Legolas have decided to reward ICO “Hodlers“, that is people who took part in the ICO and do not move the tokens from their initial wallet, will be rewarded with a holding bonus. 5% of the initial issuance will be issued each 6 months over the first 2 years (20% in total). The tokens will be rewarded to people who still hold their tokens in the original address.

This is good news for ICO participants, but also for buyers of the token as it can reduce the available supply circulating which could push up the price.

Conclusion

The Legolas Exchange has big ambitions and aims to disrupt the already disruptive crypto space by initially targeting institutional investors and providing a level of security and openness not yet seen with traditional exchanges. By taking the best parts of centralized and decentralized exchanges and combining them with industry-leading security and their own token, designed to reward holders, they are well placed to storm the exchange niche if they can successfully pull off their full launch later this year.