Neon Exchange (NEX) is a platform for decentralized cryptographic trade and payment service creation. NEX combines the NEO blockchain with an off-chain matching engine to enable much faster and more complex trades than existing decentralized exchanges.
Cryptocurrency markets have grown enormously in recent years, from a daily trade volume of $60 million in January of 2015 to more than $8 billion in November of 2017. Despite cryptocurrencies being secured by decentralized architecture, almost all cryptotrading takes place on centralized exchanges, where funds must be deposited under the control of the entity facilitating exchange. This layer of centralization puts users’ funds at risk. Decentralised exchanges have emerged where trades are executed by smart contracts on a blockchain, removing the need for a centralized third-party to control user accounts. While decreasing third-party risk, decentralised exchanges come with a price: loss of trading performance. Smart contracts are far too slow to execute complex matching logic of order books on high-volume, centralized exchanges. In practice, this means that users cannot execute complex trades, and this creates arbitrage opportunities.
The NEX project creates a hybrid system with the optimal mix of speed and security provided by a decentralized exchange with a fully trusted off-chain order matching engine capable of handling large trading volumes and supporting complex orders such as:
- Limit: Exchange token above or below a given price ratio.
- Market: Exchange one token for another at the current market price.
- Margin: Borrow with leverage, to go long or short a token.
The system will consist of three main components:
- An off-chain trade matching engine: NEX addresses the trust issue between users and the exchange using a publicly specified deterministic algorithm within their off-chain matching engine. By combining this knowledge with a public ledger of the order in which trades have been sent to the exchange and fulfilled on the NEO blockchain, any user can verify that the exchange is operating fairly.
- Third-party smart contracts through which trades are executed.
- A payment service where global assets can be converted to tokens that can be transferred directly by smart contracts, making them compatible with the exchange and with other blockchain protocols such as Ethereum. As part of their payment service, NEX will also offer a funds management layer that enables third-party smart contracts to send and receive global assets that live outside of the NEO blockchain as part of their computation. This means that the payment service could make transactions across chains – sending ETH to a NEO smart contract that then distributes it to NEO addresses.
A fee will be taken each time the payment service is used and for each trade. The more you trade, the less you pay for each trade.
The NEX token allows each holder to claim a share of the fees generated by the payment service and exchange; therefore, the token is very much a security. Profits are claimed via a staking process; where holders will be able to stake their NEX tokens at a predetermined rate which is dependent upon how many tokens are staked and how long you wish to tie up your tokens for. These are staked through smart contract architecture, and the user can then make periodic claims on the contract to retrieve their share of NEX profits since staking began. Users can choose to receive claims as a direct cut of fees across each token on the exchange or the equivalent amount in a specifies asset of their choosing.
The value of NEX is not that it creates a decentralised exchange on the NEO blockchain platform, nor its innovative off-chain order matching engine. The real value proposition behind NEX is that it could address the holy grail of blockchain – interoperability. IF the NEX platform can do what it proposes, make transactions and payments across blockchains, then it is something to get excited about.
For me the platforms ability to ‘tokenising assets’ (such as NEO, GAS, ETH) to be transacted directly via smart contracts makes them not only compatible for the exchange but with OTHER blockchain protocols beyond NEO. This is the real game changer. I think the NEX project also address scalability of transactions through their off-chain/on-chain structure which will allow for large volume and complex orders to be processed by the exchange while maintaining decentralisation of user funds.
Currently, they are working on their MVP which is scheduled for later this year. Whether or not their technical team can deliver the MVP with this cross-chain functionality remains to be seen; however, if this project can deliver the technical architecture what they have outlined in their whitepaper, it is one to watch.
By CeAnn Simpson