Post-FTX decentralized Bitcoin ecosystem

[d5000]

The FTX collapse, like MtGox, could have healthy consequences for the Bitcoin ecosystem. We have already seen people moving lots of coins from exchange wallets to their own, self-custodied wallets. That is a good first step, but we could go further, creating a post-FTX decentralized Bitcoin ecosystem.

I hope the following technologies get a boost eventually:

1) Decentralized exchanges.

No, I don't mean these "DEX"es on Ethereum which trade one kind of transaction for another one . Instead, there are mainly two types:

a) Crypto-to-Crypto:

Atomic swaps should become the standard for these operations. This is a straightforward process which has very low risks (basically, the only disadvantage is that one party can always abandon the trade).

Atomic swaps can be done on a (relatively) easy to use platform, like AtomicDEX. Or they can be created directly with a Bitcoin wallet. There is however seemingly still a lack of easy to use tools.

One suggestion could be to add Atomic swap functionality to the most common wallet implementations. I don't know about Core, but Electrum could add this function. (The well-known Atomic Wallet unfortunately is not an ideal solution, as it uses also centralized services like changenow.io and thus even can lead to KYC/AML procedures.)

b) Crypto-to-Fiat:

Bisq is probably the best model to follow here, as it doesn't rely on a centralized web app like most other P2P exchanges. I have ignored it for a long time, but I looked into it recently and there are some interesting features to prevent fraud, like Account signing. Still, it's a bit slow and has high fees. So there's much margin of improvement.

2) BitcoinScript/Taproot-based DeFi.

DeFi is based on the concept to buy or sell risks between two or multiple parties. DeFi on Ethereum has almost always centralized components, as the contracts have an owner who can become a single point of failure in some situations.

BitcoinScript based solutions can be instead completely decentralized. The counterparties create special kinds of transactions to exchange their risks and collaterals. For example, based on the Atomic Swap technology, there is possibly a way to create American options (see here and here).

There is also the Discreet Log Contracs concept. There is RGB and Taro for tokens and other contracts, and some of these solutions even support Lightning.

3) Payment processing/eCommerce

Merchants should consider moving to self hosted solutions. Also, I hope OpenBazaar gets back on track, or an alternative can emerge.

4) Integration of solutions.

Many of the solutions I mentioned have low volume and aren't well known. They're scattered in several software packages of varying characteristics (e.g. command line/gui/browser/mobile) and maturity. You won't like to install dozens of apps to do all these nice things centralized providers like FTX offered inside a single interface.

So my proposal here is to create common standards between all the mentioned apps. Create a software package which includes all functions to buy and sell Bitcoin for other crypto and fiat, sell/buy goods and services, and create tokens and DeFi contracts without centralized components.

5) Education.

The decentralized technologies I mentioned in this post have specific advantages, disadvantages and risks. Good documentation should be written for newbies to really be able to understand them, and to not get in danger to scammed.


I appreciate feedback, other ideas and contributions!

[Hydrogen]

If I was trading on an exchange. The most important considerations would be something like.

1.  Leverage
2.  Cold wallet storage to protect user deposit
3.  No ethereum or solana smart contract based bridges which are the most common attack vector for theft

Many promote movements like DEFI but I think those are vast secondary considerations.

Attaching a label like web3 or DEFI to something would only make me trust it less. As a lot of these new age finance movements have a considerable amount of hype behind them without much said about functionality. A trend which feels as if their focus is drifting away from the most relevant points. Towards things which matter least. Which is usually a very bad precedent.

[franky1]

when it comes to crypto-fiat exchanges

here is a big thing you need to consider
when parties do wire transfers.. it does not matter what they are buying/selling

if the bank sees a user using their personal account to do LOTS of wire transfers to multiple wire transfers. banks notice

if the bank sees a user using their personal account to do LOTS of wire transfers multiple amounts. banks notice

also if the user is getting charge back scammed where scumbags are trying to reverse wire transfers. banks notice

defi-dex only work if each user only does the occasional small amount to avoid all bank flags.

if they become popular and do large value or large volume. the banks notice and request account holder to explain themselves.

all of these things result in popular used reputable users end up having to set themselves up as  a business, as a money transmitter and KYC it s users

it only stays under the radar while de-fi/dex is not used much. where sellers and buyers are using their bank accounts infrequently and for only small amounts. which is not much of a scenario of building a reputation system on or a availability system

localbitcoins learned these lessons years ago and de-fi/dex is still early in learning these lessons when it comes to real fiat to crypto off ramps

[joniboini]

As long as retail still finds that doing P2P trades is a hassle then I doubt centralized platforms will disappear. Especially if they are a day trader or just love to trade regularly for some reason. Even if Bisq becomes cheaper and faster, the majority will probably still use CEX. Not to say the number of users won't increase, I just don't believe most of them will learn and compromise with the negatives of P2P trades.
 
Your suggestion to build an all-in-one app sounds good but is probably costly in terms of development. Sometimes I do find one or two apps that promise something like this but in the end, they need KYC, closed source, etc.

[DapanasFruit]

I am really hoping that the big mess created by FTX collapse and people like Sam Bankman-Friend including his ex-gf Caroline...can be teaching us in the crypto industry many lessons for a lifetime that will be staying with us and can snowball into some kind of a general awareness that when it comes to crypto if you don't have the keys you are not in control. From now on, we should not be trusting anyone no matter how good they are in the eye of the public and the politicians. May this can be starting a good revolution so we can choose the best technologies, the best platforms and the best strategies that can be working for our own advantage. I am taking a look at the list of options presented here.

[Despairo]

Just a heads up Bisq isn't only used for crypto to fiat only, you can trade crypto to crypto but the main problem is low volume. The highest volume of crypto to crypto is BTC/XMR pair and BTC/BSQ pair, while the other is really low for the last 7 days volume. I would say the real usage of decentralized exchange is only for decentralized coin, as we know Ethereum and Binance smart chain is centralized, so it's pointless to use decentralized IMO. The owner or team can freeze the token inside their hardware wallet.

[hatshepsut93]

I'm not going to try any sort of decentralized exchanges. The only operation that I do these days is selling BTC for fiat, and for that I'm satisfied with Binance. Never had any problems with deposits, selling, withdrawing fiat. The money appears in my bank account within seconds. And the withdrawal fee for fiat is something like 0.5%. So why should I risk using dex and potentially get scammed, get problems with my banks for receiving p2p transactions, wait longer time, maybe even pay higher fees.

I don't store any money on centralized exchange, so I won't be affected by a FTX-style collapse, unless I'm unlucky and it happens in the moment that I do my transaction.

[pooya87]

Every time there is a situation like this which makes it into the news with a lot of headlines, a large number of people move away from centralization and into decentralized solutions but over the long run it doesn't seem to be able to change the balance in favor of DEXes so far.

As for what I'll do, I keep on using P2P methods whenever I want to trade bitcoin with fiat. And stick to various methods that includes both CEX and DEX for altcoin trading. The problem I have with DEXes is that sometimes they don't have certain options like trading altcoins with USDT which I really hope Bisq adds on more chains (like Tron) with more liquidity on them.

No, I don't mean these "DEX"es on Ethereum which trade one kind of transaction for another one

The correct term for these platforms should be token swap platforms not DEX, if you ask me.

[franky1]

No, I don't mean these "DEX"es on Ethereum which trade one kind of transaction for another one

The correct term for these platforms should be token swap platforms not DEX, if you ask me.

TEX
token exchange

[d5000]

If I was trading on an exchange. The most important considerations would be something like.

1.  Leverage
2.  Cold wallet storage to protect user deposit
3.  No ethereum or solana smart contract based bridges which are the most common attack vector for theft

Many promote movements like DEFI but I think those are vast secondary considerations.

The goal of "DeFi" is originally to enable trading of distinct financial derivatives like options without any middlemen. Traditional Ethereum-based DeFi doesn't really allow this as there are "contract owners" and other centralized parties like bridges which can interfere.

The idea thus is, like in Discreet Log Contracts, to allow the two counterparties of each derivative contract to arrange everything between themselves (in DLCs there is additionally an oracle but without any control over the contract).

I think for daytrading all kinds of DeFi are problematic. So centralized platforms may stay for this use case.

@franky1: This is only of interest for professional traders who move large amounts back and forth, and for those it should anyway not to be much of a problem if they notify their bank about their activity.

Your suggestion to build an all-in-one app sounds good but is probably costly in terms of development.

I think not really. For most solutions there are libraries or command line versions of their basic functions, which can be used independently of their original GUI, so an "all-in-one-GUI" shouldn't be that complicated to build. It would be even easier if the projects would before agree to use common API standards.

This would be worthy a new thread in the Development forum. Maybe there is already such an initiative?

Just a heads up Bisq isn't only used for crypto to fiat only, you can trade crypto to crypto

This is true, although for me atomic swap in this case is the better solution as it is near-completely trustless and doesn't need dispute resolution (which is easy in Bisq for crypto-crypto but can't probably be completely automated, as the automation solution would have to monitor all altcoin blockchains).

The problem I have with DEXes is that sometimes they don't have certain options like trading altcoins with USDT which I really hope Bisq adds on more chains (like Tron) with more liquidity on them.

I would also very much in favour of Bisq adding direct altcoin-to-fiat trades. The reason are the unpredictable BTC transaction fees which can complicate trades if you just deposit at a time when Binance moves funds around or miners take an hour for a block ... In theory, if they keep rejecting this move, everybody can clone the Bisq code and create their own DAO.

[franky1]

if you need a de-fi to do something EG change its protocol. then its not a dex if it then has one company doing the coding

all a dex should be is a notice board of users. where you then select a user
EG if there are no users offering a stablecoin for btc. then that lack of offers is not something you blame on the dex platform/code. you blame it on lack of people having stable coin to offer

if its the case of dex not have feature X where you need to go to a central dev group to change the code. then that central group is still central group

dex should not be a central app or 1 service for al. there should be multiple dex offer noticeboards.

as a prime example.
localbitcoins got centralised because everyone used that one site. rather than there being dozens of sites like it all with different clusters of users putting up offers independently

i say this because the most decentralise exchange i used was a face to face swap at a cafe while eating a sandwich. it required no middleman to oversee have code to ensure swap went well

the closer to being able to do swaps without middle men the better. the closer to being able to do swaps without needing a specific site/service the better

[Dunamisx]

5) Education.

I will opt in for the last point here which talks about education, the beginning of everything that has to do with using a decentralized exchange or any other wrong wat if securing bitcoin is because of the absentia in the role of education, there's no enlightenment most time on this specific aspect and the areas many got exposed to may not actually matters like have an allround knowledge about bitcoin and means to store it, the incident with FTX will be a lesson to many and in this, people will realize more need to having their bitcoin in their own wallet, this will also boost and increase the interest of investors to consider bitcoin more than exchange token or coins they rely on before and choose bitcoin.

[2stout]

Post-FTX decentralized Bitcoin ecosystem:  this will be not be much different, same recurring theme since mt.gox.  It's not a matter of if but when next FTX debacle; there are contenders on the horizon.

[d5000]

if you need a de-fi to do something EG change its protocol. then its not a dex if it then has one company doing the coding

I think I get what you're trying to say, but I don't necessarily agree. If it's open source and no entity owns the main contract then always a fork can be started in the case the developer team misbehaves or misuses its power.

Bisq is a special case because of their DAO construction; if you want to fork it you also have to replicate the DAO. It's of course perfectly possible but it requires some more work than a simple software fork. They seem to have selected this structure to minimize legal risks for arbitrators.

all a dex should be is a notice board of users. where you then select a user

In the case of crypto-to-crypto exchanges I fully agree. Of course features like payment detail hashing and account signing can enhance security, but they wouldn't change the decentralized character.

But in the case of fiat-to-crypto things aren't so easy. You need some escrow/arbitration procedure, otherwise the scam potential is very high (due to chargeback risk and/or proof-of-payment faking).

dex should not be a central app or 1 service for al. there should be multiple dex offer noticeboards.

Yup. But they could use a common API/standard so they could be integrated into a common GUI. That would not threaten their descentralization.

@2stout: I'm not that pessimistic. With each of these incidents one generation of Bitcoin users learn about the "NYKNYC" approach. I think this will slowly, probably "very" slowly, drive the adoption of the decentralized solutions I mentioned.