Solution

3. DeltaDeFi Solution - Virtual Order Book

To solve the 3 problems described above, DeltaDeFi introduces a brand new solution - Virtual Order Book (VOB). The VOB is a fully non-custodial platform where users interact with smart contracts to safeguard their funds in the process of trading. The major difference between the VOB and typical order book DEXes is that DeltaDeFi would perform the transaction submission and order matching for the users. With this solution, DeltaDeFi tackles the very specific needs of serious traders looking at mitigating their custodian risk from CEXes.

3.1. Pure Trading Efficiency with Necessary Decentralization

The DeltaDeFi solution could be regarded as a design for pure efficiency. We only submit the signed transactions to the blockchain when they are matched. With this design, we make the order management costless - which is at par with CEXes. The system would also make sure every order is consumed by exactly 1 counterparty, which eliminates the problem of UTxO contention in off-chain computation. Accordingly, DeltaDeFi’s users are highly confident that their orders are being confirmed at the time of hitting API calls, which also closes the UX gap between CEXes and DEXes. While we are building the native order book solution on top of the UTxO model, it also inherently benefitted from not having slippage at the blockchain level.

The pure trading efficiency features come with a scarification of users’ power in interacting with the protocol - every order action has to be overseen by DeltaDeFi’s system. That being said, DeltaDeFi is designed in a way where users still get full control of their funds, with or without support from DeltaDeFi’s system. We would suggest users always conduct withdrawal and order cancellation through the system API to provide guaranteed order flows for other users. However, such actions related to fund autonomy can also be conducted without DeltaDeFi’s permission. It is only suggested in any emergency scenarios such as service downtime, loss of keys for authentication, etc. If such a mechanism is abused in normal scenarios undermining other users’ order finality, bad actors would be labeled with temporarily limited access to the protocol.

3.2. Adopt the Wisdom from Established Financial Markets

One of the key parts of DeltaDeFi protocol is to conduct order matching for users. Since order placement is separated from blockchain transactions, we can adopt the traditional wisdom from existing financial markets. On order priority, we would adopt the mainstream and battle-tested mechanism - price-time priority - the orders with the best prices would match first, when there are orders with the same prices, priority would be given to the earlier-placed orders. Such an order-matching mechanism could ensure the protocol fairness to every user.

An order matching event is equivalent to a commercial contract signing on buying and selling goods at an agreed price. DeltaDeFi aims to provide a similar commitment to users when orders are confirmed by DeltaDeFi’s system but not from the blockchain confirmation. For all the aggressive goals, there is still a chance that orders pass the blockchain validation and the system API response returns a false positive. In this sense, DeltaDeFi protocol would maintain an insurance fund to compensate for such service dissatisfactory events. It is also another area that makes DeltaDeFi’s service at par with CEXes.

3.3. Transparent Protocol Governance

The notation of “all transactions should be overseen by DeltaDeFi system” might sound like the protocol remains in huge control in order execution. Operationally this concern is legit. This is, nonetheless, mitigated by economically rational behavior, which DeltaDeFi allows and promotes the protocol governance by the market forces.

Also adopting the idea from established exchanges, in DeltaDeFi users can always request for their trading records and receive complete aggregated trading records for the market. The market data is in aggregated form to protect other traders’ privacy since it is material information with the potential of being exploited. With such logs, the community can easily reconcile the protocol behavior, making sure the DeltaDeFi system does not abuse any power given. One example is that the DeltaDeFi system is technically possible to squeeze all potential slippage from market order (this is the slippage presented in traditional orderbook-based centralized exchange as well, not talking about the slippage introduced by AMM DEXes). However, with such trading records, the community can reveal suspicious patterns easily, and eventually leave the DeltaDeFi protocol for trading for such a reason. Given the rational behavior of every party involved, the DeltaDeFi team is incentivized to perform with integrity.

Additional transparency DeltaDeFi protocol would provide is open sourcing of critical source code, including all smart contracts and critical pieces of infrastructure which is necessary to provide confidence to the community. With all disclosure of information and records, a natural form of integrity governance could be formed to monitor the system's behavior.