Jack Dorsey’s new decentralised crypto exchange doesn’t want to define ‘trust’ amid regulatory uncertainty

Jack Dorsey’s new decentralised crypto exchange doesn’t want to define ‘trust’ amid regulatory uncertainty
Jack Dorsey appearing before a Senate Judiciary Committee hearing about the 2020 US election and social mediaScreenshot/BI India
  • Jack Dorsey’s Square has released the whitepaper, which highlights how its new decentralised exchangetbDEX — will work.
  • Users will still be able to retain access to their wallets and won’t have to depend on a central custodian wallet.
  • Transaction fees on tbDEX will increase or decrease based on the amount of anonymity the parties involved want.
Twitter founder Jack Dorsey’s second venture, Square, has finally published the white paper on its upcoming decentralised crypto exchange (DEX). Called the tbDEX, it follows some of the aspects of DEXs, but is less decentralised than most others. As a consequence, it’s also much less focused on anonymity than other DEXs, passing the buck onto the participants.

“The protocol [tbDEX] has no opinion on anonymity as a feature or consequence of transactions.”

Excerpt from white paper titled ‘tbDEX: A Liquidity Protocol v0.1

The paper argues that as long as the protocol is interacting with the fiat currency system, no interface can be truly ‘trustless’ — without trusting a third part like a bank, a person or any intermediary. All endpoints, including decentralised exchanges like tbDEX, will ‘always’ be subject to regulation.

Hence, to hedge against any upcoming crypto regulation, tdDEX is putting the responsibility of ‘trust’ on wallets and participating financial institutions (PFIs) to figure it out amongst themselves.

“The nature of this trust relationship will never be universal,” highlights the whitepaper. Instead, it postulates that trust can vary from jurisdiction to jurisdiction, across different regulations and laws, and between individuals and institutions depending on their risk tolerance, price and other facts.

It would violate the principle of trying to achieve the maximum amount of decentralisation if the negotiation of trust was dictated at the protocol layer, as that would necessarily involve some form of permissioned federation.

Excerpt from white paper titled ‘tbDEX: A Liquidity Protocol v0.1


How Dorsey’s tbDEX is looking to solve for the ‘trust’ conundrum

Unlike centralised exchanges, where a central crypto wallet holds all the tokens in the name of the exchange’s users, DEXs let users control their own wallets. The central wallet in traditional exchanges is called a ‘custodian wallet’, and since users have no option but to trust the holder of this wallet. Simply put, it’s not a ‘trustless’ system.

Traditionally on DEXs, trades between different wallets are done using a smart contract system called ‘atomic swaps’. Both the crypto assets being traded must be submitted to these smart contracts, which execute the trade.

But, Dorsey’s tbDEX works a little differently. Rather than use atomic swaps, it will allow users to transact using a messaging protocol that lets users negotiate between themselves.

“The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous,” the whitepaper says.

Trust as a function of reputation

Wallets and other financial participants will have to negotiate trust directly between each other and may rely on mutually trusted third-parties to vouch for the counterparties.
For example, a wallet company can volunteer to publish a ‘sentiment list’ about financial institutions or decentralised identifiers — which ones it believes are good, and which ones aren’t. They can also choose to exclude certain parties, which they find untrustworthy.

Any exchange of value must be fundamentally based on other means of governing trust — particularly reputation.

Excerpt from white paper titled ‘tbDEX: A Liquidity Protocol v0.1

Further, the transaction fees on tbDEX will increase or decrease based on the amount of anonymity a user wants. The protocol will allow secure exchange of ‘the minimum necessary identity information’, provided that is acceptable to the parties involved in the transaction — “be they legal, regulatory, or related to any other consideration of risk”. And, the protocol won’t collect any personally identifiable information.

So, what’s next?

The whitepaper is essentially a proposal for how Dorsey wants the tbDEX to function, but it’s not a done deal. Currently, it has been put out into the public domain for comments and suggestions.

Further revisions of the whitepaper are expected to address incomplete elements or any unforeseen challenges.

Only once the final design for the protocol behind tdDEX is finalised will the project be developed and published. The company is yet to communicate when that might be.

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