Core Problem Statement

2. Core Problem Statement - Inefficient Non-custodial High Frequency Trading

The intersection of decentralized finance (DeFi) and high-frequency trading (HFT) presents a unique set of challenges within the current trading ecosystem, particularly when leveraging the security and robustness of layer-1 blockchains. Centralized and pseudo-decentralized exchanges, while currently efficient, pose significant custodial risks, highlighting the need for efficient, non-custodial trading solutions.

2.1. The Problem

2.1.1. Centralized / Pseudo-decentralized Existing Solutions

A significant volume of trading activity is concentrated within centralized exchanges (CEXes), which operate on a custodial basis. This model, despite its widespread use, exposes traders to risks, including potential security breaches and mismanagement of funds, evidenced by collapses of platforms like FTX. The reliance on CEXes underscores the critical demand for secure, non-custodial alternatives that can offer comparable efficiency without compromising user safety.

Alternatively, there are attempts to provide support to HFT in several decentralized exchanges. However, most are deemed as “pseudo-decentralized” solutions as these architectures need to rely on or build on a fast blockchain, which is either a dedicated separated blockchain or a fast but less secure layer-1 blockchain. Either direction sacrifices security on the non-custodial assets. A native solution that can decouple trading speed from the blockchain speed is yet to be developed.

2.1.2. DEX Product Gaps

Decentralized exchanges (DEXes) aim to address the custodial risks associated with CEXes but introduce their own set of challenges, notably in order management and fee structures. The inherent design of most DEXes results in fees for actions that are typically cost-free in CEXes, such as order creation, modification, and cancellation. This discrepancy not only affects trading efficiency but also widens the gap between the user experiences of CEXes and DEXes, hindering broader adoption among professional traders.

2.1.3 Integration Complexities

The integration of trading strategies and solutions with DEXes is further complicated by technical and operational challenges. These include variable and non-deterministic confirmation times, which necessitate a high degree of technical expertise and significantly increase the engineering costs associated with DEX integration. Such complexities deter the seamless transition of liquidity from CEXes to DEXes and inhibit the potential for innovation in decentralized trading platforms.

2.2. Objective

Addressing these challenges is imperative to unlocking the full potential of DeFi trading, facilitating the migration of liquidity from centralized to decentralized platforms, and ensuring a secure, efficient, and equitable trading environment. By overcoming the limitations of current non-custodial trading mechanisms and bridging the gap between CEXes and DEXes, there exists a substantial opportunity to enhance market liquidity, reduce bid-ask spreads, and foster a more inclusive and resilient DeFi ecosystem.