The Main Benefits of the DutchX Mechanism

The DutchX #5

When introducing the DutchX, we’ve shown that the current implementation of order book based centralized and decentralized exchanges face some major shortcomings: The high risk of loss of funds, difficulties for less liquid markets, and practices like front-running.

We’ve demonstrated that the mechanism of the DutchX remedies these drawbacks: it allows for a fair price finding mechanism that encourages participants to reveal their true willingness to pay and eliminates front-running, a major problem that both order book based centralized and decentralized exchanges are facing. Front-running is the advantage of someone being able to act on information that is available to them first (e.g. miners who can decide in which order they are putting transactions into a block, and in which block they’re putting the transactions into).

In the first state of the DutchX, when sellers deposit their sellTokens, they potentially have more than 6 hours to do so. This reduces the emphasis on which block their sellOrder is mined. Bidders, being active in the second state when the auction is running, have a similar advantage: The price function decreases so slowly that the price will not significantly change over the course of a number of blocks. The price for all sellers and the price for all bidders will be the same — making it irrelevant at which point their transaction is mined. The exchange itself also cannot act on information ahead of time: the smart contract code of the DutchX matches automatically and on-chain.

Hence, with batched orders entering the block at the time the auction clears with the same price for all bidders and sellers, neither miners nor the exchange itself, or other participants will be able to game the system.

The traditional order book model of a centralized exchange, which is a continuous auction model executing orders one-by-one, seems inadequate to be implemented on the blockchain — it even amplifies the front-running problem. There is no continuous time on the blockchain, there is only block time! On the one hand, this leaves more time to front-run, but on the other hand, it also allows for more parties to front-run due to already publicly available information (before the transaction is executed).

The DutchX implements an entirely different design which is more suitable to the technological environment of the blockchain, and results in a number of additional benefits compared to other decentralized exchanges.

Price Volatility and Fairness

In the DutchX, you may consider sell orders as slowly executed, safe market orders and bids as limit orders. As the smart contract batches sell orders and executes these at once, there is only one market clearing price. This means that it is safe to include market orders of any size without quick price movements (“slippage”), i.e. triggering order book spikes as known from traditional order books.

Price volatility of a traditional order book.

Many decentralized exchanges do not match orders automatically, resulting in overlapping orders in the order book and thus creating arbitrage opportunities. This often is facilitated by the time lag when cancelling orders. Again, due to the automatic on-chain matching with one clearing price, this cannot happen on the DutchX. On the DutchX, essentially, there is no spread between bids and asks!

Gas Costs

There is a lot to say about gas costs. To keep it short: Gas costs on the DutchX are very similar to other decentralized exchanges currently live.

However, three aspects make the DutchX attractive from a gas point of view: