-This article was sent to us by Fabio Canesin, co-founder of Nash.-
When I first learned about Bitcoin, I quickly realized there were many hurdles in the way of adoption. As a result, I dismissed the possibility of it having a revolutionary impact during its early years. But despite my doubts I stuck around, doing GPU mining and later getting involved in open-source development in the blockchain space – and I’m glad I did. In early 2018, along with four other open source developers, I started to work on Nash, an ambitious platform that aims to make decentralized finance available to everyone.
I got involved with Bitcoin very early because of my interest, as an engineering student, in running costly computational tasks on graphics cards, a method called GPGPU. At the time I worked as a research assistant in a lab called POLO, Brazil’s National Institute of Cooling and Thermophysics. My interest was in fluid mechanics simulations, but one of the only real applications of GPGPU was Bitcoin mining, so I used it as a learning tool.
After university, my job as a research engineer gave me the opportunity to work abroad, where I had to struggle with different bank accounts and currency conversions. Being mobile really helped me see the potential of cryptocurrencies for borderless payments. Blockchain not only promises a future of self-custodial solutions but already offers real upgrades to the infrastructure we use for financial services – more than any alternative technology. Trustless ledgers let us cut out many inefficient steps, offering instant, borderless transactions and highly liquid markets, available 24/7, which can benefit both businesses and everyday users. Automatic agreements enforced by smart contracts can cut costs for everyone. Even regulators stand to benefit because automation can help combat money laundering.
Put simply, blockchain offers a more efficient, more secure, more fair way of managing assets.
At the same time, my first experiences with blockchain weren’t all positive. If you wanted to sell Bitcoin for cash, or get hold of Bitcoin without mining, you needed to use a centralized exchange (CEX), like Mt. Gox. These platforms weren’t properly regulated and seemed shady. It felt like a risk sending personal identification documents to them. They also completely defeated the point of Bitcoin: holding and controlling your own assets, which became vulnerable to hackers when placed under the exchange’s control. The story of the Mt. Gox hack is now famous and it still affects the cryptocurrency market today.
However, there was also a certain necessity to centralized exchanges. As more and more “altcoins”, like Litecoin, began to appear, opportunities for trading proliferated. Because different blockchains are not inherently compatible with each other, people turned to centralized exchanges to trade these assets. As activity picked up, they became even more important because only they could provide the performance and capital efficiency to trade with profits. So people ended up surrendering their actual coins to exchange operators.
It was clear there were limitations on blockchain that didn’t allow for a smooth user experience. If this technology was going to change the world, then it would need to become more scalable, and the platforms for interacting with it would need to become more secure, trustworthy and accessible.
Centralized exchanges today
A great deal has changed in blockchain since the early days, with exciting new technologies and platforms pointing toward wider adoption. However, the largest cryptocurrency exchanges today are all still centralized, and still have the same problems.
According to Forbes, hackers stole over $4 billion of cryptocurrency during 2019, up from $1.7 billion in 2018. You can find more statistics about such hacks in this article on cryptocurrency trading. Even if users funds aren’t stolen, they can be locked for days – a clear sign that they are not under users’ control.
While some exchanges take care to follow legal guidelines, many skirt the law or operate in legal gray areas. One shady practice on the part of a few centralized exchanges is wash trading. Another is front-running: deliberately inserting orders ahead of users’ own to profit from their own customers. Centralized exchanges are black boxes, so it is hard to provide exact figures, but one indicator is the “fake volume” measured by projects such as the Blockchain Transparency Institute.
Nonetheless, despite these issues, users still prefer to trade on centralized exchanges because they used to be faster and more convenient than decentralized alternatives.
Decentralized exchanges (DEXes)
It’s possible to create exchanges directly on top of blockchain infrastructure to preserve its security properties – crucially, that of being non-custodial. However this comes with a number of trade-offs.
Firstly, blockchains are slow by nature. This reduces the speed with which each market can react, making pricing inefficient on on-chain DEXes. What’s more, the proximity of decentralized exchanges to the blockchain results in a cumbersome user interface based around block explorers, transaction fees and transaction-signing.
Fully on-chain decentralized exchanges are also limited by the lack of compatibility between different blockchains. They are at their best when exchanging assets based on a single blockchain. Especially problematic for decentralized exchanges is Bitcoin. The first and most important crypto asset, Bitcoin does not support smart contracts and is hence difficult to integrate into decentralized trading platforms. This significantly limits their appeal.
There are two main ways in which decentralized exchanges implement Bitcoin and cross-chain trading. The most common method is “token wrapping”, where a “wrapped” token is issued on one chain that represents an asset upon another chain. For example, wrapped Bitcoin (wBTC) is an ERC-20 token on the Ethereum blockchain that corresponds to Bitcoin on the Bitcoin blockchain. However, token wrapping is essentially custodial. When you trade wrapped Bitcoin, your real Bitcoin is left with a custodian outside the wrapped Bitcoin smart contract. If a custodian is compromised, the Bitcoin that backs the wrapped token could be stolen, or an attacker could mint unlimited amounts of the wrapped token to destroy its value. Wrapped tokens are effectively derivatives. They have different security profiles from the underlying asset, Bitcoin.
The other major cross-chain technique is to use “atomic swaps”. This involves following a protocol that enables two people to trade assets directly between chains without trusting a third party. Atomic swaps are non-custodial. However, for an atomic swap to be safe, both trading parties must monitor chains closely throughout the entire transaction, meaning that a user needs to know in advance when exactly an order will be filled. This defeats the point of orders placed above or below the current price level, which constitute most of the volume on a large exchange. Atomic swaps are more like an over-the-counter deal.
None of these solutions provides what users really need for blockchain to see wide adoption: non-custodial infrastructure that is easy to use and supports fast-moving, liquid markets.
Nash’s revolutionary technology
Nash has developed a new approach to non-custodial trading whose performance can compete with centralized solutions. This is achieved through a fast off-chain matching engine that manages state channels on different blockchains, allowing for feeless trades and high-speed orderbook-based markets.
User funds remain on-chain within state channels and are never given over to Nash. Users make trades and the matching engine updates their balances for each blockchain, which are periodically written to the chain itself. This avoids speed bottlenecks that result from blockchain architecture. User balances can only be updated when they have provided cryptographic signatures, so their funds are always under their control. The matching engine cannot change a user’s balances except as the result of a trade the user has explicitly requested.
This approach allows Nash to integrate native Bitcoin trading by using a state channel solution similar to the Lightning Network, based not on full smart contracts but hashed time-locked contracts (HTLCs) and other scripting primitives available on Bitcoin. At present, Nash is the only non-custodial exchange that allows users to trade real (not wrapped) Bitcoin on full-scale markets with order books.
What’s more, the Nash matching engine is deterministic and provably fair. Nash is hence able to provide proof that trades are being matched fairly and that practices such as front-running are not taking place. Input events are cryptographically linked to output, meaning auditors can reconstruct the state of the system and mathematically verify that FIFO matching rules have never been broken.
Nash combines these developments with other innovations that further increase security and functionality. It is the first cryptocurrency exchange to offer API keys secured by multi-party computation (MPC), providing the kind of APIs institutions need, but with the significant benefit of being a non-custodial exchange. On a DEX, a single user key always controls all assets – a security concern that is unacceptable for institutions and high-volume traders. In future, these APIs can be adapted for user wallets, restricting access to a user’s full private key and allowing address whitelisting and withdrawal limits to provide hardware-level security at absolutely no cost.
Decentralized finance for everyone
The end goal of all these innovations is to bring us closer to our mission of making decentralized finance available to everyone. However, this doesn’t just involve technological progress. Design and user experience are also key.
Nash puts user experience first, working continuously to improve interfaces, and presents not just an exchange, but a full platform offering all the digital asset services a user could need.
Besides trading, it is possible to store assets from multiple blockchains, monitor an investment portfolio and buy or sell digital assets using national currencies. All of this is achieved in a non-custodial manner that does not compromise the fundamental principles of blockchain-based assets.
For business customers, Nash is also developing a payment service that protects exchange rates and settles transactions directly to fiat currency – saving them any trouble integrating with the blockchain themselves.
Last but not least, Nash places strong emphasis on legal compliance. We must create an environment in which the legal status of digital assets is known, making them amenable to use by businesses. It is not realistic to expect established businesses to operate under questionable legal conditions. Moreover, compliance is crucial for safeguarding user and investor capital.
By registering the Nash Exchange token (NEX) as a security, we laid the groundwork for future companies to release their own digital security tokens. The NEX token distributes a 75% share of Nash’s exchange revenue back to the community.
Giving back to the community is essential for Nash. The community is where our company founders met, and it represents our vision of blockchain as a whole: a technology that can help everyone achieve greater financial freedom.
We believe we are building the infrastructure required for the benefits of digital assets to be felt worldwide in the years to come.