A Decentralized Alternative to the Order Book

In a crypto-economic trading platform:

  • “The network becomes the exchange”
  • Snapchat (ephemeral) bid-asks
  • User-defined smart contracts

Exchanges are regulated by the SEC and take years to gain approval.  Recently, the SEC has announced that all crypto exchanges are illegal unless they register with SEC.

There are two key design principles informing a market design presented below for a crypto-economy platform involving the exchange of digital assets including cryptocurrency deemed securities by SEC.

  • Eliminate enormous multi-million dollar rents captured by exchange intermediaries and front running HFT
  • Accept regulation by the SEC, but as an Electronic Communications Network (ECN) not an exchange. 

Traditional currency or asset exchange involve a two-sided auction market design better known as an order book.  Currently,  all crypto exchanges whether custodial, so-called “decentralized” exchanges (DEX), or relays with 0x smart contracts , still feature order books as a market design.

What we propose is a market design where “the network is the exchange”.  We strongly believe that this design would allow for registration with the SEC as a broker-dealer running an Electronic Communication Network (ECN) which is a subset of a Alternative Trading System (ATS) .  Getting approval for an ECN would be must faster than getting approval as an exchange.

Value Proposition:

  • user-defined contracts ( e.g. options with odd expiration dates, long-short pairs, straddles)
  • tokens earned by peers supplying liquidity spread contracts
  • elimination of latency rents going to HFT and server co-location fees going to exchange
  • elimination of “data ownership” rents earned by exchange

Specification suggestions:

  • high frequency, many-to-many, pub-sub protocol
  • messages in form of  Myerson “take it or leave it” (TIOLI) bid-asks
  • “serverless” with ephemeral matching with-in Redis-like in-memory data structure store, used as a database, cache and message broker.
  • ephemeral bid-ask data, only data “owned” is history of matches.
  • discrete time, batch process (i.e. events) following  Eric Budish’s work on continuous time design flaw in  HFT platforms 
  • third party AI bid bots
  • third party custodial services
  • settlement a function of DTL layer

Companies with pub-sub platforms

  • Satori (formerly MZ)
  • Facebook (WhatsApp)
  • TenCent (WeChat)
  • Google (Cloud Pub/Sub)

Satori is leading the integration of a pub-sub transaction layer with a DLT called Hedera Hashgraph.

The question is what will be the market design for the transaction layer?

Gabe Leydon, CEO Satori, TokenPost Interview During Korean Blockchain Open Forum, July 2018 https://www.youtube.com/watch?v=3Gc2wRk5WE4

Satori’s “AI Mesh network” transaction layer  stats — 500 Million “messages” per second or 1 million publishers sending 100 bytes a second 

Hedera Hashgraph’s DLT stats — 500,000 transactions per second with less than a second to 100% consensus based on a “gossip of gossip protocol”

Some URLs relevant to stock and asset market design choices:

Eric Budish, The Design of Financial Exchange, Some Open Questions at the Intersection of Econ and CS.  Simons Institute of Computing UCB, November 2015 https://www.youtube.com/watch?v=Rilv2AJ1TWM

Eric Budish, “Will the Market Fix the Market?”, AEA/AFA Joint Luncheon Talk, January 2017 https://www.aeaweb.org/webcasts/2017/luncheon

Albert “Pete” Kyle, “The Changing Nature of Trading Markets, U of Maryland Conference,  May 2017 https://www.rhsmith.umd.edu/files/Documents/Centers/CFP/2017/kyle.pdf

Albert ” Pete” Kyle, “Continuous Auctions and Insider Trading” Econometrica, November 1985 http://Albert “Pete” Kyle, “The Changing Nature of Trading Markets,

Fisher Black, Toward A Fully Automatic Stock Exchange, 1971  http://17mj9yvb9fl2p5m872gtgax5.wpengine.netdna-cdn.com/wp-content/uploads/2017/07/Towards-a-fully-automated-stock-exhchange-part-1.pdf

Target Markets:

continuous time order-processing client-server exchanges with massive multi-million dollar rents going to server owners and HFT snipers.

  • Pseudo-crypto DEX with client server order books
  • FOREX with tokenized fiat money
  • Swaps
  • Options
  • Dark Pools
  • Replace “book-maker” gambling with p2p gambling