In October, Digitex Futures announced a partnership with Ethereum Plasma. If you didn’t read part 1 of this article, which explains who Digitex Futures is, what Ethereum Plasma is, and what a futures exchange is all about, you can catch up right here.
Decentralized Versus Centralized Exchanges
Centralized exchanges represent the first phase of the cryptocurrency exchange market. Most exchanges today are centralized, which simply means the exchange controls the currency. If you open an account at Coinbase, for instance, and drop $1,000 USD into your account, the exchange has possession of your dollars. When you convert that $1,000 into Bitcoin, Ethereum, or another cryptocurrency available at Coinbase, the exchange is in possession of those currencies.
The biggest danger of a centralized exchange is the possibility of losing your currency if the exchange is hacked. On June 19, 2011, crypto traders on the Mt. Gox exchange were shocked when they discovered that the exchange had been hacked and millions of dollars in Bitcoin were stolen. Since then, more than a dozen cryptocurrency exchanges have been hacked.
On top of the security issue, centralized exchanges typically have higher fees.
Decentralized exchanges are more secure than centralized exchanges and allow traders to send cryptocurrency to each other without the money flowing through the exchange. However, no decentralized cryptocurrency exchange currently offers fiat-to-crypto trading, which means traders still need to purchase a cryptocurrency from a centralized exchange before they can do any decentralized trading. Transaction fees being what they are, it can be costly to engage in any type of cryptocurrency trading on a regular basis.
The Significance of the Digitex Futures/Ethereum Plasma Partnership
As mentioned earlier, Digitex Futures promises to change how crypto trading is done by partnering with Ethereum Plasma on some of its features. It would be a mistake to call it a decentralized exchange because the Plasma side chain is run entirely by the Digitex Futures node. That makes it a centralized exchange in a technical sense. However, because the trader’s currency never is touched by the exchange itself, it means that crypto traders can transact directly through the smart contracts feature in a trustless fashion ensuring that a hack on the exchange won’t result in any loss of currency. You can learn more about this at Digitex Futures.
This simple technical difference between a centralized exchange and a hybrid exchange like Digitex Futures doesn’t mean there aren’t any risks at all, however.
First, Ethereum Plasma is still in its infancy. There are currently no test use cases to prove its security is 100% trustable. In fact, smart contracts are still full of vulnerabilities. It’s important to understand that a smart contract is nothing more than computer code, and they are written by human coders. That means that the chance of a bug or deficiency is somewhat high. That’s not to say that Plasma’s coders are bad coders. They could be the best coders in the business, but computer programs are seldom perfect. Even the best ones could have some bugs.
Secondly, if Plasma is being run entirely on the Digitex Futures node, this centralization still puts trader currency at risk. If the centralized node is compromised, hackers will still have access to smart contracts where user currency is stored. In my mind, this is perhaps more secure than a centralized exchange, but not by much. It does, however, add another layer of security, but only insomuch as the node itself is secure.
That said, the fact that Digitex Futures can use Plasma to incorporate smart contracts in a trustless way means the exchange can focus on improving its core functions and less on maintaining its technology. Of course, it also means that the core technology managing the smart contracts where user currency is stored is in the hands of someone other than Digitex Futures. That could be good or bad depending on how Plasma is rolled out and whether or not it proves itself secure and scalable. On those two points, we’ll have to wait and see.
Meet the Digitex Token (DGTX)
The biggest thing to note about Digitex Futures is the incorporation of its own digital token. DGTX is an Ethereum ERC-223 token that allows the exchange to offer no-fee trustless transactions. Instead of charging user fees for trading transactions, the exchange is relying on tokenomics to earn its keep. In other words, users will be required to make their transactions using the DGTX token. The hope is that the value of the token will rise as users adopt DGTX and make their transactions.
It’s a brilliant plan, and if it works, I suspect Digitex Futures could become a leader in the decentralized exchange space. It could even start a trend. Only 1 billion DGTX tokens will be created at the outset with no plans to introduce new tokens for the first two years of operation. The exchange plans to put 65% of the tokens up for sale initially with 20% earmarked for “Digitex Market Makers,” which are algorithmic trading bots programmed with a break-even trading strategy, 5% will go to referrals, and the remaining 10% will be set aside for the Digitex team and advisors on a three-year vesting schedule.
Digitex Futures is banking on the value of DGTX to rise as more users adopt the exchange for trading. I certainly think that is likely to happen, however, the exchange should be prepared for a token dump immediately following its ICO closure as this is typically what happens. Early investors buy in at the low price and then sell after the close of the ICO at a higher price to reap short-term gains. Such dumps typically drive the price of a token down, but that doesn’t mean a token can’t recover. It simply means that Digitex Futures should be prepared to deliver outstanding service following its initial investment period in order to showcase value to early investors and drive up demand for the token.
After the initial two-year incubation period, Digitex Futures will rely on DGTX holders to determine when and how many new tokens to be created, effectively making DGTX a staking token as well as a utility/security token (its utility lies in the necessity of the token for transactional use while its security function lies in the trading of cryptocurrency futures contracts).
Digitex Futures looks like an exchange worth checking into. Serious traders waiting for a viable derivatives market should give it ample consideration. To become an early backer, sign up to get early access right now.