tbDEX is a an open, decentralised bitcoin exchange that is aimed at enabling global, secure, cheaper and more inclusive transactions as compared to traditional exchanges. The tbDEX protocol follows some aspects of a decentralised exchange, but experts say it is less decentralised and trustless than was initially expected. tbDEX puts trust-building in the hands of the users through a messaging protocol. Users can use their personal discretion before transacting with buyers and sellers of crypto assets.
Jack Dorsey's digital payments business Square has released the draft design principles and ambitions for its decentralised bitcoin exchange called tbDEX. A whitepaper on the company's website read: “An open, decentralized financial system will enable all people to exchange value and transact with each other globally, securely, and at significantly lower cost and more inclusively than what traditional financial systems allow.”
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Decentralized crypto exchanges (DEXs) were created to remove the need for an authority to oversee and authorise trades performed on a specific exchange. They do not involve any third-party intervention, unlike centralised exchanges that operate much like banks. Most exchanges in India are currently centralised.
Since DEXs operate via smart contracts and do not have any central authority to oversee users funds or trades, they enable what are called 'trustless' transactions.
Dorsey's tbDEX protocol follows some aspects of a decentralised exchange or DEX, but experts say it is less decentralised and trustless than was expected.
Let's take a quick look at what tbDEX is all about and how it is different from other DEXs.
What is tbDEX and how does it work?
tbDEX is a decentralised exchange that will allow users to transact in two different asset classes. For instance, users can transact in a traditional fiat currency and cryptocurrency without the need for a central exchange.
The tbDEX protocol provides both on-ramp and off-ramp framework between traditional currency and cryptocurrency. What does this mean?
On-ramp is a transaction where a traditional currency is exchanged for cryptocurrency. Think of it as a ramp leading from traditional money markets to crypto markets. Hence, to enter the crypto market, the first transaction is always on-ramp. Exchanges and crypto ATMs are examples of on-ramp transactions.
Off-ramp allows crypto investors to exit the crypto market by exchanging crypto assets for traditional fiat currency or other services that accept crypto payments. Think of this as a ramp that leads away from the crypto markets to retail/money markets.
On-ramp and off-ramp transactions form the backbone of the crypto market. They allow investors to enter and exit at any time. Making these transactions as simple as possible is key to attracting new users, which is what tbDEX does.
Is tbDEX a trustless system?
Most crypto exchanges currently maintain a central wallet or a custodian wallet for transfer of crypto assets between users. These exchanges require users to trust the custodian wallet that is owned and managed by the exchange. But tbDEX, like other DEXs, uses a different protocol where custodian wallet of exchanges is not required. This eliminates the need for the trust factor involved in the exchange of crypto assets, making it a trustless exchange.
But, what makes tbDEX different from other DEXs?
As mentioned earlier, DEXs ensure trust between transacting parties through smart contracts that are built on the Ethereum blockchain. These contracts execute various actions autonomously based on preset conditions, such as passing of expiry dates, reaching target prices, etc. Smart contracts ensure complete security and tamper-free transactions.
Smart contracts also ensure the transacting parties meet the mandated criteria before the exchange of assets on DEX. There is no need for repeated KYC (Know Your Customer) verification while transacting over decentralised exchanges.
Dorsey’s tbDEX, however, puts trust-building in the hands of the users through a messaging protocol. Users can use their personal discretion before transacting with buyers and sellers of crypto assets. This means that users will not have to trust custodian wallets or exchanges. But, they will also have to forego the benefits of trust-establishing algorithms.
Transaction on DEXs happen between wallets. This means users can keep their real identities masked from others. But their credentials are verified by smart contracts. But tbDEX relies upon a messaging facility for users to build trust. This needs to be done without depending on an underlying protocol.
tbDEX aims to resolve this by charging transaction fees based on the anonymity maintained by the transactors. The transaction costs are governed by the magnitude of risk involved. If users demand maximum anonymity, transaction fees are also much higher and vice versa. Thus, users will be incentivised to provide maximum information to facilitate trust-building.