SMT: The future of exchanges

I just worked trough the SMT whitepaper and I have to say it's one of the best papers I read so far. I will go into detail in a follow up post, but here I want to collect my thoughts to something more general.

Right now everything in crypto world is about exchange. It's about valuation of tokens and profits trough exchange. It's also about tokenizing the world and make every asset tradable on a blockchain via escrow and pegging. The SMT whitepaper doesn't go into much detail about the asset exchange, but it's likely to be comparable to the BitShares DEX and works in competition to the BitShares DEX and the other decentralized exchanges based on Ethereum or future projects.

All these exchanges work good for tokens that are native to the platform. Often these token are convertible to each other at any time via the use of automated market makers. To provide utility in a broader sense, the basic idea is to convert tokens that are not native to the blockchain to tradable second class citizens. This is realized by gateways that issues IOUs, which are backed by external assets in escrow. One example right now is OpenLedger on BitShares that issues IOUs as OPEN.BTC and OPEN.ETH. Other companies plan to peg stock market products to IOUs in near future.

OpenLedger focuses on the BitShares DEX currently, but could create additional gateways for additional decentralized exchanges like Steem. Tether does exactly this today by issuing Tethers on Omnilayer and as ERC20 token. A problem that arises is that not two different companies can issue the same token. So every issuer has his own token and own markets to interchange his token for other token. Effectively this limits the liquidity, since a user who wants to trade USD for BTC but have to choose between the markets OPEN.BTC/bitUSD, OTHER.BTC/bitUSD, OPEN.BTC/OPEN.USDT, OTHER.BTC/OPEN.USD,... A second problem is that involvement of a third party implies trust in the reliability of the gateway to release the escrowed funds in return for the IOUs.

Taking a step back, the real purpose is that BTC should be traded for USD. For the sake of the argument, USD can be replaced by Tether in this calculation. Tokens representing the same physical value can be issued by the escrowing company on different blockchains as native tokens. A centralized gateway service can make these token transferable across different platforms, without introducing additional third parties. For token without central governance it's a different game. Here comes the ICON project into play.

In terms of ICON every blockchain can be referred to as a community. ICON is a network where every community gets represented by exactly one node, that can act as a gateway to allow transparent communication with all other communities. To facilitate this, the gateway interchanges value with other communities by converting them on the fly using market makers and the ICON network. In effect it should be possible to send BTC to Tether and receive the respective amount of USD determined by a mathematical formula expressed as smart contracts. The counterparty risk involved in the transaction is eliminated because the USD is transferred directly to the users wallet. This can be further facilitated by atomic swaps, removing the need for the intermediary conversion to the native token of the ICON blockchain. But it can also be used to Exchange BTC to STEEM and go shopping for SMTs in the integrated DEX. In fact it can be used to convert any IOU in any IOU using the different integrated DEXs given appropriate user interfaces that hide the complexity behind the scenes.

For me this is the relevance of ICON and DEX. In future there might be exactly one gateway bridging every blockchain to every other blockchain. Every blockchain hosts a DEX for IOUs of that blockchain. In addition the the role of the more generalized ICON network can also be filled by specialized blockchain agnostic applications like Tether, which issue tokens in the same denomination in different varieties and act as the gateway to interchange them between platforms. By using these mechanisms, decentralized exchanges will become competitive with current major exchanges and grow due to low transaction fees. In fact, SMTs can be traded without any transaction fees.