Today’s episode is from a 2018 conversation with Alex Wearn, co-founder and CEO of IDEX, one of the top decentralized exchanges on Ethereum. We discuss decentralized exchanges – what they are, how they benefit users, and the challenge of transitioning users to a mental model that doesn’t include a signup or password. For the full conversation, check out Flippening episode 33.
Links Relevant To This Episode
- Nomics on Twitter
- Clay Collins
- Nomics API
- Alex Wearn
- Aurora Labs
- Ethereum (ETH)
Clay: Welcome to Daily Wisdom from the Flippening Podcast. These episodes feature short, to the point clips from our full-length interviews. We talk to the men and women behind the trades, crypto exchanges, and regulations with the goal of helping you become a better, more informed investor.
Michael: Hi I’m Michael Kaplan, editor of the Flippening Podcast. Today’s episode is from a 2018 conversation with Alex Wearn, co-founder and CEO of Aurora, the company behind IDEX, the number one decentralized exchange on Ethereum. We discuss decentralized exchanges—what they are, how they benefit users—[00:00:30] and the challenge of transitioning users to a mental model that doesn’t include a signup or password. For the full conversation, check out Flippening episode 33.
This episode has two sponsors. The first sponsor is Nexo, which offers instant crypto credit lines, check them out at Nexo.io. Our second sponsor is the Nomics Cryptocurrency Market Cap & Data API for institutions, fintech apps, and funds.
Without further ado, here’s our conversation with Alex Wearn, co-founder and CEO of Aurora. Enjoy.
Clay: I think people mean a lot of different things [00:01:00] when they refer to decentralized exchanges. What does decentralized exchange mean to you?
Alex: To me, a decentralized exchange is any exchange that uses a blockchain and private keys to manage the custody of funds. Just to expand on that a little bit, the key is that the private keys that control the funds are not under the control of the exchange operators. It’s something that the end-user is always in possession of and is using to actually give instructions [00:01:30] to anything that has to do with the movement of funds. A traditional centralized exchange, when you want to trade on the platform, the first thing you have to do is send your cryptocurrency to a wallet that they control. That’s the deposit process. Before you can do anything, you actually have to give up control of your cryptocurrency. There’s a phrase in the space that’s if you don’t control the private keys, then it’s not your money.
Again and again, we see issues where centralized exchanges, they’re a big target for hackers and thieves, [00:02:00] because of the fact that they’re pooling everybody’s funds into one place and under one kind of architecture or system. A decentralized exchange allows users to trade in a more peer-to-peer fashion, where they’re never giving up control to that centralized entity, and everything that they do on the platform is explicitly authorized and approved through their own private key.
Clay: According to that definition, there does seem a little bit of gray area with an exchange like Shapeshift, where it’s noncustodial [00:02:30] so they’re not holding your funds day in and day out, but they do hold your funds to make the trade. Perhaps they are custody-ing it, but it’s for a much shorter period of time. Is that the distinction? Would you call Shapeshift a decentralized exchange or not?
Alex: I would not call it a centralized exchange because of the fact that you just mentioned, they’re holding it, even though it’s a brief period of time. It’s a great innovation on that front. It’s also great the way they are able to operate and connect across different blockchains. That’s one of the things that DEXs today [00:03:00] cannot do. Because of that how do you connect that leap from one cryptocurrency on one blockchain to a cryptocurrency on another?
Shapeshift does that by minimizing the amount of time that you have to trust that third party. But there’s still the risk that you send the initial funds, and you never get back what you first sent them. On a decentralized exchange, that’s never a problem because the transactions are what’s called atomic, meaning they either happen in both of the trades, both of the transactions go through, both parties’ assets are swapped, [00:03:30] or the transaction fails. It’s all or nothing.
Clay: It might be spiritually kind of on the same continuum as a decentralized exchange, but it doesn’t quite hit the mark in terms of qualifying as such. With the definition established, let’s move on to the problems that are solved. What problems do you think at the end of the day a decentralized exchange solves for other than or rather in addition to [00:04:00] theft and security issues, and sort of trusting a centralized third party?
Alex: That first one, that issue of theft, that really can be defined as custody. If you want to trade your assets, do you have to give up custody and give permission to a third party to control it? That to me is the primary benefit of a decentralized exchange and really kind of 95% of the reason for using one. If you’re a user that’s interested in either self-custodying, because that’s something that’s appealing to you, [00:04:30] you like the digitization of assets, kind of this cryptocurrency revolution. Or because you have, and I think plenty of reason to do so, you have suspicion on the ability for centralized exchanges to keep your cryptocurrency safe.
Another reason would be kind of the ease of onboarding. In order to trade on these decentralized exchanges, your account is actually your private key and your wallet. You don’t need to create a new signup process and then deposit into [00:05:00] the centralized exchange in order to participate. You just show up with your wallet and you’re ready to trade. That’s really helpful for new users that are already familiar with the cryptocurrency process, understand kind of private key technology that they can easily move to one of these new platforms.
I think that’s part of what gets me excited, you know, if we see continued development and hopefully, future adoption of decentralized applications, is this notion that you have an account that can work and be used [00:05:30] at all sorts of different platforms and applications. It’s actually something we have struggled with, with some of our users where they’re used to creating a username password and getting them used to this notion that it’s actually this Ethereum wallet. That’s what you use, it’s your password, it’s your login, it’s your account, it’s everything but it’s not inherently restricted to just IDEX. That’s a bit of a mental model, kind of a shift that we have to work with to educate our users.
Clay: [00:06:00] That’s it for today. If you like what you heard and want to support the show, please consider leaving us a review on iTunes, Stitcher, or wherever you listen to podcasts. If you decide to leave us a review after subscribing, we’ll send you a free Nomics T-shirt. Just hit us up on Twitter @NomicsFinance after you’ve left a review and we’ll hook you up. You may also be interested in nomics.com, our crypto market cap and pricing website, check us out at nomics.com. Now, stick around for our legal disclaimer.
All opinions expressed by podcast hosts or guests are solely their own opinion and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
The producers, hosts, and guests of the show may maintain positions in the companies or assets discussed today.