A new eye catching whitepaper has been floating around Twitter recently. BitDEX wants to “build a decentralized BitMEX using priceless financial contracts,” but does the execution live up to its name?
Why do people even want decentralized margin?
Because transactions on decentralized exchanges are matched through an outside venue, (your wallet) FinCEN doesn’t recognize it as a traditional exchange. This means that a protocol can be overcome regulatory scrutiny in the U.S. when it comes to KYC (Know Your Customer) and margin limits.
It’s no question that margin trading is trendy, and Americans feel left out. Right now there are many traders who use VPNs to access crypto exchanges that allow high margin. The dream for those people would be to have access to margin while not feeling like they have to hide.
This obviously isn’t the only appeal to decentralized exchanges, but this project in particular is an example of the demand for access to an exchange like BitMEX.
How would BitDEX work?
“Alice and Bob need to agree on how much margin they each should have. If Alice and Bob agree that they are properly margined, they don’t need a centralized operator to agree with them.”
Basically, the protocol matches two people who want to go long and short for the same amount of money. The two parties then agree upon what type of margin they want to us. If that margin runs out, they will deposit more if they want to stay in the trade, much like BitMEX’s cross leveraging feature.
There is no centralized price feed, so parties margin requirements being maintained are audited by themselves and the system. If one feels like the other isn’t meeting margin requirements, they can dispute it through an oracle. There is a penalty that goes against the losing side of the dispute.
If a trader wanted to close their long position, they would have to enter an offsetting short position. After this, they can close both positions, transferring the party who opposed their long to the original person who had a long position against them. This means that when one party closes a position, it doesn’t mean that they both have to.
Why can’t we just use lending pools?
Right now, there are decentralized margin platforms like dYdX and Fulcrum that are plugged into aggregated liquidity protocols. This is where they have the ability to lend for margin trading and improve liquidity on their pairs.
Even with those features, there isn’t enough liquidity for people trading with thousands of dollars to have a tight spread. Since BitDEX uses priceless financial contracts, as long as someone can find a long to their short, spread will be non-existent. It’s basically an agreement that lets two parties bet and observe the price of an asset from a distance.
With that being said, the ability and frequency of matching orders depends on the usage of that specific protocol. The idea is in an early stage, but it’s nice to see more innovation in the space, and build upon our idea that decentralized margin trading will be there when BitMEX isn’t.