One of the persistent contradictions of the cryptocurrency space has been the theme of decentralized assets traded on centralized exchanges.
In the wake of the 0x revolution, a new generation of decentralized exchanges (DEXs) are taking root. These decentralized exchanges address some of the existing problems with older DEXs, while still lacking the capabilities of many of the leading centralized exchanges. Individuals looking to engage in margin lending or margin trading are still forced to funnel their liquidity to centralized token and coin exchanges, exposing them to an additional form of counterparty risk.
Counterparty risk is encountered when the risk of a third party defaulting jeopardizes the assets of an investor. Margin lending exposes the lender to counterparty risk both from the exchanges and the borrower. The specific type of avoidable counterparty risk incurred by lenders and borrowers using centralized exchanges is called custodial risk; allowing individuals to maintain control of the private keys to their wallets at all times obviates this risk. Lenders face additional counterparty risk from underwater borrowers who fail to be liquidated in time.
Decentralized margin comes with significant technical challenges. The most significan challenge is the design of a reliable oracle that can match the settlement security of centralized exchanges. In the context of margin lending, the oracle problem is caused because Ethereum contracts are not natively aware of asset prices on or off the blockchain. If smart contracts can’t stay aware of asset prices on the open market, they can’t consistently force-liquidate borrowers on that market to protect lenders from adverse movements. The most serious obstacle to decentralized margin lending is being able to reliably and securely liquidate troubled positions. The bZx protocol serves as an on-chain solution to these challenges.
Componet of BzX
bZx.js Library
The bZx.js library is a promise-based asynchronous JavaScript library that contains all the functions needed to interact with bZx smart contracts on-chain. Software developers can use this library to easily integrate with and develop for the bZx protocol. Relays and exchanges will use this library to build an interface for margin lending and trading on bZx, providing a value-add to their customers. These relays will be able to add a funding tab, similar to many centralized exchanges. In the same way that 0x.js allowed relays to easily create a frontend for exchanges, bZx.js will do likewise for funding.
bZx Portal
The bZx Portal is a web-based decentralized application that serves as a frontend to the bZx protocol, utilizes the bZx.js library, and serves as a one-stop shop for individuals looking to interact with the protocol for margin lending and trading. There is no requirement to use the bZx Portal for lending or trading on bZx, but it provides a convenient access point for users that aren’t otherwise on an exchange or relay.
The initial release of the bZx Portal will be split into four sections:
A section for the lender and trader to make or take bZx loan orders.
A section for the trader to manage the loan once the funds are lent, including the opening of trades, the closing of trades, and ending a loan early.
A section for the lender to manage the loan once the funds are lent including reviewing how their funds are being used and requesting an interest payout.
A section for bounty hunters to manage open trades for margin liquidation, and to liquidate if needed
bZxOracle is fully decentralized and operates partially off-chain. When creating an order, an oracle provider must be specified. If the bZxOracle is specified, then anyone can call the liquidateTrade contract method and receive a bounty when the proper conditions are met. Support is provided at the protocol level to allow third-party oracles to impose whatever constraints necessary on when the liquidateTrade method can be called. With bZxOracle, bounty hunters keep track of all open trades taken using bZx, determining whether any have gone below margin maintenance. This pushes the most computationally intensive tasks off-chain. When a bounty hunter has determined that a position has gone below margin maintenance, they call into bZx to liquidate the trade with bZxOracle
The fees collected by bZxOracle will be tokenized and distributed to its users. Lenders and borrowers will receive Sugar (SUGR) tokens to compensate them for taker fees and gas. Bounty hunters will receive Sugar tokens as their bounty. This token will be used to decentralize governance of the oracle, giving the individuals invested in the network a vote in proportion to their usage. SUGR tokens are backed by Ether and redeemable for a fixed percent of the bZxOracle reserve. As bZxOracle collects more fees, the Ether reserve grows along with the value of the SUGR token. The distribution of the SUGR token will take strong inspiration from Ethfinex and their Nectar token. The SUGR token roll-out will be incremental, with the oracle initially distributing Ether to the lenders, borrowers, and bounty hunters.