openANX (OAX) Real World Application of Decentralized Exchanges
Introduction to openANX
The openANX DAO
At the core of the openANX platform is the Decentralized Autonomous Organization, which is run by smart contracts. The governance model affects the way the DAO behaves, thus always staying in the best interest of all participants.
The ability to assess risk in a quantifiable way is unique to the openANX platform. Gateway tokens can be traded, creating a new dynamic and further increasing transparency.
Aggregated Order Books
Isolated order books from each asset gateway will be aggregated using the liquidity aggregation system provided by ANX. The end user will have access to a single, seamless order book.
openANX takes the strengths of both centralized and decentralized exchanges to create a new middle ground. Addressing the evolving needs of exchanges will attract many participants.
In the future, customers will be trading their assets through decentralized trustless exchanges. They will only interact with existing centralized exchanges for onboard and offboarding real world funds; but now the consumer will be protected with blockchain locked collateral and a real-world dispute resolution process.
Disputes can be escalated beyond the asset gateway. An impartial dispute resolution mechanism exists through a third party.
Open ANX Foundation
The Foundation’s objective is to promote the real-world application of the openANX platform. It is a non-profit organization.
As the project develops, we have a number of key milestones along the way.
Some More Details About openANX (OAX)
The openANX platform will take advantage of technical developments on the Ethereum
blockchain such as payment channels (Raiden3, 0x, Swap, ERC204) and utilize them to
overcome the challenges faced by the current CEM. It will co-opt the strengths of the
existing model to improve the existent decentralized exchange attempts by linking existing
exchange platforms (“Asset Gateways”) to the infrastructure network and enforcing a
collateralized deposit system that will provide users with a way to measure risk.
In addition, by being open source, the project will be transparent and subject to scrutiny and
input from users and the wider community. In lieu of a centralized authority (government or
regulator) the only way to enforce transparency is to write it into the blockchain itself.
By utilizing the latest technological advances and a peer-reviewed and implemented open
source code, the platform will integrate the strengths of the existing CEM model with the
best functionality and feature of the decentralized model while circumventing the
shortcomings of both systems.
The initiative will offer secondary markets (exchange services) for all forms of Ethereum
tokens. Ethereum tokens can be in the form of native Ethereum tokens (such as tokens for
other DAOs), or tokenized representations of off-blockchain assets. Users will be able to
create an order book and list their token for trading on the openANX decentralized exchange,
for a token fee and by redeeming OAX tokens for memberships. All off-chain services to the
DAO will be supplied from competing suppliers.
The Structure of the New Marketplace
Open source, decentralized, transparently governed exchanges will, in our view, eventually dominate the crypto market. With the increasing maturity of the Ethereum Network, Raiden and governance frameworks such as boardroom.to, that vision is now viable. With openANX, we plan to create a truly open source and decentralized platform that uses a hybrid model to integrate the key strengths of the existing CEM with key enhancements such as credit risk assessment, structured dispute resolution and a collateralized deposit system to empower users, providers and third parties to properly evaluate the uncertainty that has long been a part of the marketplace. In this chapter, we will examine the openANX project in detail, the philosophy behind it and how it will aim to address the issues we have discussed. We will also conduct a comparison of existing decentralized exchanges and how the openANX platform will overcome their limitations.
Why Open Source?
The supporters of the project have benefited greatly from the support and advice provided by members of the crypto community, and from this position we would like to give back and support a model that ultimately puts power and transparency back into the hands of the users. We at openANX believe that universal access to a transparent, fair system for the
trading of digital tokens is an integral step along the road to mass adoption of digital tokens.
We believe that the benefits of an open source platform not only regarding code, but also in
relation to suppliers, development, payment gateways and a credit market allow for greater
viability for a project of this nature. The code persists and can be improved via the
community long past the dissolution of the original impetus that drove the project’s
foundation6. As a first step along this path, the Foundation is seeking to raise funds to build
the first viable, aggregated, open source and decentralized exchange.
Open sourcing the platform will result in:
• A decentralized matching engine and P2P facility integrated using an off-chain (e.g.
Raiden, Swap, or 0x) architecture supporting Ethereum tokens (ERC20)
• A wide network of suppliers offering services such as development, off blockchain
gateways for non-native Ethereum tokens (cash and other blockchains), legal
support for developers, users, and suppliers
• An Ethereum governance mechanism to approve code changes, selection of
suppliers and all other aspects of the DAO
With the recent developments on the Ethereum chain7, the use of ERC20 tokens and the
use of new payment exchange protocols, we feel the project is now viable.
The Benefits of Transparency
A lack of transparency is a weakness in both the CEM and the decentralized, P2P exchange model. Lack of open source code, questions about fractional reserves, and opaque security protocols have badly damaged the reputation of CEM’s, while on the decentralized side of the equation, limited availability of asset gateway services and low buy/sell order volume are much discussed. In the openANX platform, a key selling point of the project stems from the application of collateralized reserves deposited onto the blockchain by Asset Gateways. Each gateway chooses the level of its deposit and the information is transparent for all users to access. Alongside other assessment parameters, this allows for effective credit risk evaluation.
The Nature of openANX’s Decentralization
Previous attempts at decentralization have been unsuccessful because they relied on a
“barter” system for trading digital tokens, where User A has Bitcoin and User B has
Ethereum and the two can trade like-for-like, but does not take fiat into account. No existing
decentralized exchange has managed to attract a sufficient number of new or existing users
who wish to reflect their trading gains in cash. This limits growth and adoption, which leads
to low trade volume and liquidity.
The aim of this paper and the accompanying project are to show one way forward.
Decentralization is the key driver of this project. The advantages of decentralization are well
established8: robust systems reduce the chance of downtime, a diverse ecosystem promotes
competition and transparency, and economies of networks introduce greater liquidity.
Below is a condensed list of the key issues for existing decentralized models:
1. Lack of adequate liquidity and market participation, and unacceptably slow trading
latency and API infrastructure, reducing liquidity from professional traders and
2. No credit market
3. Lack of lending, borrowing and leverage
4. Lack of an adequate legal framework and operating model transparency prevents
5.Inability to differentiate between the creditworthiness of off-chain Asset Gateways
6. Lack of efficient integration with the existing legacy financial infrastructure
7. Centrally managed, closed, source code, data, and/or governance
8. Absence of backing by a full-scale market operator with the experience in both crypto
and traditional fiat markets
9. Minimal or no incentivized support function
The key issue for most users of current decentralized platforms such as Bitsquare, Bitshare
and EtherDelta can be summarized in two simple points:
• Low liquidity means it is impossible to do trades at “volume”, which limits most
effective trading strategies9
• One (traditional wire) settlement per trade means it is impossible for some of these
platforms to attract large players - holders of large asset caches prefer to maximize
returns by reducing costs for settlement by utilizing large “batch” style payments of a
single settlement for many trades
How is openANX different from other decentralized exchanges?
The openANX project is different from other decentralized exchange initiatives announced
as it recognizes that non-trading ancillary services are required for attracting the critical
mass of users required for a functional ecosystem network. Central to openANX is a
decentralized exchange married to a mechanism that provides transparency as to the
counterparty credit quality of service provider participants (i.e. Asset Gateways). While price
discovery and trading transaction execution can be achieved through smart contracts, the
practical reality is not all trading exchange functionalities can be decentralized, and as these
services are required in order for an exchange to achieve critical mass the next best solution
is to provide the means for appropriate risk assessment of these Asset Gateways. By
making available risk assessment indicators (including but not limited to the posting of
collateral, membership levels, verified identification information, and other records onto the
blockchain) and formalizing defined dispute resolution mechanisms (also inserted onto the
blockchain), participants are provided with transparent access to important information
needed to evaluate the credit quality of Asset Gateways. Participants are therefore able to
make optimal decisions with regards to not only trading prices but also the counterparty risk
they are willing to assume for non-crypto pair trading. These features of openANX enable
the execution of more than just crypto pair trading and will therefore attract trading
participants to drive volume, price efficiency and liquidity, which in turn draws other market
participants who provide additional useful functions to the network economy. These would
include not only existing centralized exchanges who bring their existing transaction volume,
but also other participants such as rating agencies who evaluate Asset Gateway
creditworthiness and credit risk arbitrage traders who effectively provide market pricing.
The aim of the openANX project is to create a full, autonomous and decentralized exchange,
using 100% open source code, data and governance. The exchange is to be managed in the
digital world by a transparent DAO, and in the physical world with the support of a
transparent non-profit organization.
What does this mean for users?
openANX User Journey
•Automatic governance for lending, borrowing, leveraged, and unleveraged exchange
matching on-chain through open source software
• The exchange uses “ANX order book aggregation” to pair buy/sell orders across
multiple order books, joining disparate order books through graph algorithms to
• A collateral management function allows users to assess the creditworthiness of
Asset Gateways, with integrated order book support to allowing trading of credit and
• Fast and efficient trading infrastructure as a result of implementing exchange
matching through payment and exchange channels
• Handling fiat and other off-chain assets through the use of gateways that must
provide collateral in on-chain assets in order to issue tokens
• An open, decentralized system with incentives to suppliers and users to provide
• “Bootstrap” support by ANX, a sizable trusted market operator with the capability to
attract market makers for liquidity, develop the open source software, and provide
minimal viable supplier services in terms of off-chain gateways, KYC services and
• Jurisdictional and policy configurations to allow off-chain Asset Gateways to meet
regulatory obligations and still participate
What are the benefits of decentralized exchange platforms?
All cryptocurrency users know the shortcomings of the current centralized exchange model (CEM). Everyone knows about hacks of exchanges, and news of a fresh hack comes along fairly often. Nearly every trader I know has lost some BTC or alt-coins at least once. Does it have to be that way?
There have been some attempts to improve the system. Exchanges upgrade security, or a decentralized exchange comes along, promising change. This is good. But many of these new projects then suffer their own problems. The news around users of some exchanges not being able to withdraw or deposit funds are common news these days too.
When we talk about these decentralized exchange platforms like EtherDelta and BitShare, we see they have made some improvements and are great. But they have two new problems.
First, they don’t have enough users and therefore they lack trade volume and hence liquidity. Go to any one of them and try to buy 10 BTC and see what happens.
Second, some of these platforms use a model that means “one settlement per trade” This is not ideal for a trader making many trades, or volume players.
So, the decentralized model is good, but it still has some room for improvement.
We think the market can’t improve until these problems are addressed.
The openANX Market Structure
The openANX platform will consist of the following market participants:
- Exchange users
- Asset Gateways
- Order book sponsors
- KYC/AML services
- Dispute referees
- Voting members
openANX Token Allocation and Distribution
The supply of openANX is limited to the number of one hundred million (100,000,000) in
total (including those available for sale during the Token Sale) and will be generated
immediately upon the launch (“Token Launch”).
The tokens will be distributed in the following manner:
80% (30/30/20) of the tokens will be eventually allocated amongst the community; the
remaining 20% will be allocated to the Foundation initiator, early backers, and the
i. Restriction on the use of the funds
To remain in line with the spirit of the project’s open and transparent philosophy, all
funds shall be tracked and reported according to the Foundation’s guidelines. A
custodian will monitor the usage of the digital tokens and shares with the community
ii. Financial planning and reporting The Foundation shall develop financial planning and review financial performance of the previous quarter.
iii. Digital tokens management The digital tokens belonging to the Foundation shall be managed by authorized personnel. The security of digital tokens is ensured by multi signature technology. iv. Digital wallet protocol The Foundation’s digital wallet shall be protected by a multiple signature technology mechanism.
v. Disclosure On a regular basis, the Foundation shall disclose on the topics regarding community matters, including status of development, operations, and the usage of tokens, as well as whether the Foundation operates in accordance with the governance policy.
openANX (OAX) FAQ
openANX, OAX and the Open ANX Foundation – What is the difference?
- openANX is the name of the platform and project. It provides advantages such as aggregated order books, transparent collateral and credit risk markets. It is the real-world application of decentralized exchanges.
- OAX is the name for the ERC20 tokens that are used to participate (eg: to acquire memberships) on the openANX platform
- Open ANX Foundation is the name of the non-profit organization incorporated in Hong Kong. Its objective is to promote the real-world application of the openANX platform and oversee its initial development.
What is a centralized exchange and what advantages/disadvantages does it have?
- Most existing traditional exchanges today are centralized exchanges, meaning there is a single entity that controls and is responsible for the operation of the exchange.
- Centralized exchanges have some advantages such as providing critical services, liquidity and banking relationships. However, there are major disadvantages such as a lack of financial and operational transparency, and security concerns as demonstrated by hacked exchanges that resulted in the loss of hundreds of millions of dollars as well as trust and confidence from users and the general public. Trading on centralized exchanges also defeats the purpose of having decentralized currencies (Bitcoin, alternative cryptocurrencies).
- The term exchange is somewhat misleading in the traditional sense – i.e. on stock exchanges or online marketplace platforms, at the end of a transaction there is the delivery of the purchased goods as well as the transfer of payments. On a crypto centralized “exchange” there is no payment or coin changing hands amongst buyers and sellers (and hence why the transaction is not recorded on the blockchain); rather the transaction is reflected only on the internal accounting records of the exchange and a selling customer that previously was owed coins by the exchange is now owed fiat currency instead. As he still does not hold physical possession, his account is essentially an IOU issued by the exchange to the seller.
What are decentralized exchanges (DEX)?
- Decentralized exchanges are the proposed solution to the problems faced by centralized exchanges and their users. While current decentralized exchanges are a step in the right direction, they often suffer problems such as low volume and liquidity due to the lack of integration of the strengths and key functions of centralized exchanges.
- DEX do not have integrated banking relationships nor integrated onboard/offboard payment channels, thus fiat trading is not possible on the platform, and it only allows trading of crypto pairs which severely limits trading activity. They are much less practical for users, especially for non-technical users, unless they already have crypto tokens and are not seeking to monetize into fiat.
How does openANX differ from other decentralized exchanges (DEX)?
- Firstly, and most importantly, openANX is complementary to decentralized exchanges. Many Ethereum initiatives such as 0x, RAIDEN, SWAP, will support trustless trading of Ethereum tokens. However, they don’t solve the problem of onboarding and offboarding real world funds. openANX provides an asset gateway mechanism to practically onboard and offboard real world currencies whilst affording consumer greater transparency and increased protection with collateral and a dispute resolution process. The fiat currencies safely tokenized by compatible asset gateways are essentially gateway tokens that can then be traded on other Ethereum decentralized exchanges.
- Many existing DEX suffer from low trade volumes which leads to low liquidity, partly owing to their “one trade per settlement” model: traders execute one trade and then must wait for the real-world currency settlement before being able to trade again, during which the traders are exposed to counterparty credit and settlement risks. Low volume is also due to lower number of users as decentralized exchanges that use cryptographic tokens only are difficult to enter, due to their inherent lack of fiat gateways. With the provision of a safe tokenization process on openANX, traders will be able to onboard funds and trade multiple times before offboarding; this is crucial for the market makers and arbitrage traders that provide critical levels of liquidity.
- Additionally, existing centralized and decentralized exchanges operate using fragmented liquidity pools. openANX aggregates the liquidity from each of its asset gateway participants (some of whom are centralized exchanges) to provide increased levels of liquidity. This also lowers the barrier to entry for new asset gateways as they will have access to the overall openANX liquidity pool.
- Finally, existing DEX fail to adequately provide transparency on the explicit counter party credit risk associated with asset gateways. openANX allows asset gateways tokens to be traded against each other’s, providing a market for credit risk, which results in numerous advantages such as opportunity for hedging credit risk and allowing the explicit pricing of credit risk be to expressed by the market (price discovery).
- The cryptocurrency community is wary of government regulations (despite the accompanying safety net), yet would still like to have a transparent guarantee of their assets. Existing centralized and decentralized exchanges do not address this need due to their lack of financial or operational transparency. The openANX platform will be open source and governed by a DAO/non-profit “Open ANX Foundation”, and its objective being to promote the real-world application of the openANX platform. Being open source and valuing transparency allows the openANX project to stay true to the movement of decentralization.
- On the openANX platform, asset gateways fulfil the role of holding customer funds under custody and issuing gateway tokens on the blockchain. The gateways should still hold the customer funds in segregated accounts, however the gateway can also post locked up collateral on the openANX DAO. This collateral is time locked and made available for dispute resolution. In this fashion, customers have additional, transparent data available to determine the creditworthiness of the gateway (as a function of real world factors and collateral value).
- Risk assessment is impossible without access to various data about the asset gateway. The exchange models available currently do not provide this information, therefore traders and users cannot price risk. On the openANX platform, the replacement of exchange IOUs with fiat tokens and the availability of information to evaluate risk (collateral, market value of token, credit risk factors etc.) enables traders to start factoring in risk in their trades.
- Asset gateway tokens can then be traded against each other, with a premium or discount, representing perceived credit risk; this creates a market and price discovery mechanism for credit risk
What is an asset gateway?
- An asset gateway takes off-chain assets from customers, and mints an on-chain ERC20 token equivalent. Amongst other requirements, an asset gateway should:
- Post some amount of locked collateral into the openANX DAO,
- Incorporate acceptance of the openANX dispute resolution process into its customer terms and conditions, and
- Pre-declare its KYC and AML policy and nominate the KYC/AML contract that is used to enforce its regulatory obligations on the blockchain
What is the DAO and how does it interact with the openANX platform?
- DAO stands for “Decentralized Autonomous Organization”, it functions using smart contracts on Ethereum. openANX abides by the DAO, which is governed by the voters on the platform. This is one of the many strengths of the openANX platform – the governance is decentralized and can mould the way the platform behaves and develops.
What is an aggregated order book?
- Current centralized exchanges each have isolated order books that don’t communicate with each other. This creates a problem in that the barrier for entry is high, and it leads to only a few exchanges maintaining and attracting sufficient liquidity to make them financially and operationally viable. Using the liquidity aggregation technology provided by ANX, the openANX platform can aggregate all the order books so the end user can interact with a single, seamless order book that has the combined volume and liquidity from all asset gateways.
What is the distinction between the non-profit Open ANX Foundation and ANX International?
- The Open ANX Foundation and ANX International (“ANX”) are separate entities. ANX will contribute proprietary IP to kick-start the openANX platform. Maintenance and funding for the openANX platform will be performed by the non-profit Open ANX Foundation. After the platform launch, ANX will merely be an asset gateway and supplier on the openANX platform. Other suppliers can be selected by the DAO governance board.
What does a gateway token represent?
- A gateway token represents an obligation of the issuer which users have direct ownership and control of. The market value of these tokens depends on various factors which may determine the perceived risk associated with the gateway issuer, and may include collateral placed, asset gateway reputation, country of issue and KYC processes.
What is the credit risk market?
- The value of different gateway tokens can change, especially if issues arise for an asset gateway. Different asset gateways have gateway tokens that may be perceived by the market as having different risk and hence value. For instance – Acme exchange will issue AcmeUSD tokens as their gateway tokens. The value of AcmeUSD and ANXUSD will be different, as Acme exchange and ANX (as a gateway) will have different risk, which can be priced quantitatively due to the transparent nature of the platform. Note that the function of the gateway tokens is still the same. These tokens can be traded against each other and therefore long risk positions can be closed. This creates a new market dynamic – the credit risk market.
Historical Centralized Exchange Model (CEM)
The current paradigm of the CEM began with Mt. Gox, and has developed and matured to reach the status quo. The CEM allows companies to provide services for users to buy/sell tokens, or exchange them for other assets through a central gateway platform for a fee. These proceeds ensure the service provider in return offers customer support, security and a suite of product offerings. The strengths of the system have developed over time to coalesce around banking relationships (the ability to turn Bitcoin or ETH into cash) and providing liquidity. However, with repeated security breaches in various exchanges and poor management, public’s faith in the CEM system is increasingly waning. The fundamental question is one of trust — without an effective way to measure risk, users tend to under-price its potential.
However, there are deeper underlying issues other than security concerns and lack of trust. First among these is a lack of a mature infrastructure, and the system is skewed in its design as it rewards “early adopters”, be it an exchange, an information site or other service provider, making it difficult for interested new entrants to gain access to information which would allow them to objectively assess risk and engage in digital token trading reliably.
Secondly, and equally important, is the reputational issue . While much of the popularity of digital tokens are due to their decentralized nature, this fragmentation exacerbates many of the CEM’s inherent flaws, such as the lack of regulation and transparency, security risks, possible overcapitalization, and an opacity regarding creditworthiness and credit risk for token holders dealing with these exchanges. These shortcomings are major obstacles in the next development and widespread adoption of the digital token class as a whole.
In summary, centralized exchanges provide valuable services by acting as asset gateways. It allows the offering of multiple levels of market activities that cannot be matched by decentralized exchanges. However, these strengths are offset by a number of significant weaknesses, including the possibility of substantial financial loss, as well as the reputational damage to the digital tokens ecosystem. Each failure, be it Bitfinex or others, impact all users indirectly and reduced the valuation of the market as a whole, by damaging the credibility of digital tokens as a reliable medium of exchange.
The key weaknesses in CEM stem from: 1. Custody of customer digital tokens (private keys) 2. Corresponding credit risk to customers upon security or fraud incidents 3. Lack of consumer protection and avenues for dispute resolution 4. Lack of transparency on finances to allow customers to assess credit risk 5. Opaque closed source code and centralized data stores 5.1 Each develops their own exchange, deposit, withdrawal and security software; these are typically not open source (with no or limited audits) 5.2. Metrics and order data within centralised exchanges is not visible to customers, it is unclear to market participants if the reported data is true and complete 6. Fragmented liquidity as the proliferation of exchanges results in separate trading pools
If we look at the list of the most widely used exchanges, we find that the virtue of market dominance is driven by aggregation and accretion over time, the clear majority of trade volume is handled by a small number of player. Currently, most transactions run through approximately 20 centralised exchanges, with the bulk running through the top nine, namely:
• Poloniex • Kraken • Bitfinex • Quoine • BTC38 • BTC-e • Bittrex • Coinspot • Bitstamp
Out of these 9 exchanges, more than half have been hacked and suffered significant financial losses. The common assumption that the larger players should be more resistant to these malicious hacks due to having greater resources and better security has been disproven, as well as the idea that if an exchange keeps a low profile and attempts to tread a “middle path” it may avoid attracting the attention.
Emergence of the Decentralized Exchange Model (DEM) The shortcomings of centralized exchanges have seen a number of decentralized exchanges emerge. These largely fit into two categories; those that handle native fiat currencies, and those that handle only pure digital tokens.
A number of pure decentralized digital token exchanges and protocols are starting to emerge, notably on-blockchain markets such as cryptoderivatives.market, and offblockchain protocols such as 0x and Raiden for single blockchain token trading.
For cross blockchain exchange, the emergence of the Lightning network for cross blockchain atomic swaps is promising.
These initiatives are becoming broadly accepted by the industry as the likely future of pure native digital currency token trading. Each has benefits and disadvantages, but all lack fiat currency bridging, which is needed to avoid mainstream use of centralized exchanges. The closest fiat currency solution for these exchanges are modelled along the lines of Tether, where each tokenized unit of currency is reportedly held in custody. There is however some level of industry unease with regards to the transparency of data, and consumer protection with these types of solutions. Regardless of industry perception, there is clearly a degree of credit risk for customers of Tether style solutions, with entity, banking, and perhaps sovereign risks with little recourse.
The lack of convenient and safe fiat currency bridging almost certainly contributes to the lack of liquidity in pure digital token exchanges, in comparison to the incumbent centralized exchanges.
The other category of decentralized exchanges focus on the fiat currency problem. Various platforms such BitSquare have emerged which support fiat currency and digital token transactions; however, these exchanges have not managed to gain the critical levels of liquidity and trade volumes to supplant the centralised exchanges. The need to perform fiat settlements on a one to one basis to transactions is one reason for this. Highly liquid markets require the presence of market makers and arbitrage traders. These market participants require the ability to trade frequently, with a much higher frequency than that supported by trades linked to legacy financial services payment latencies.
The challenge then, is to solve the centralization problem while avoiding the pitfalls of existing, decentralized exchanges, such as low liquidity and a lack of choice when it comes to ancillary services.
For more details on the project, download the white paper at www.openanx.org
or join the slack channel
openANX (OAX) Market Infrastructure
The openANX platform will consist of the following market participants:
• Exchange users
• Asset Gateways
• Order book sponsors
• KYC/AML services
• Dispute referees
• Voting membersopenANX Market
Exchange users are users who wish to participate in the exchange, using the services for native token trading or for real world asset trading. Exchange users of real world assets will require a relationship with an Asset Gateway. In most jurisdictions Asset Gateways are obliged to perform KYC and AML in order to operate legally and maintain the necessary relationships with financial services suppliers such as banks.
Asset Gateways take into custody real world assets such as EUR or USD fiat and in turn mint ERC20 tokens onto the blockchain. Note that these tokens are not “generic” USD tokens, rather the tokens are specific to the issuing gateway, for example ANX may issue ANXUSD tokens.
Before receipt of funds and issuance of tokens, most Asset Gateways will first request a KYC/AML service to be performed on any user receiving these real-world assets. This is done by the nomination of a KYC service smart contract address as part of the Asset Gateway registration.
When a user establishes a relationship with a gateway, the gateway will first direct them to one or more KYC services. The KYC service will provide a KYC rating, which is registered into the openANX DAO. Note that no physical documents or other materials are stored on the blockchain, merely an Ethereum address. The KYC service will stipulate a KYC level, and validity date range through the KYC API.
Once a user has satisfied the KYC requirements, the gateway can release the token to the user. Gateway tokens generally require one of the following:
• No KYC at all (tokens can be transferred to or from any valid Ethereum address)
• Boundary KYC (tokens are can only be minted to, and redeemed from, KYC’d addresses, however minted tokens can be freely transferred between addresses),
• Full KYC (tokens can only be minted to, redeemed from, transferred, and exchanged with addresses that maintain the stated KYC service approval)
Asset Gateways will be afforded varying KYC parameters according to their requirements. Many Asset Gateways are expected to register and supply their own KYC service implementation, as in some jurisdictions it is difficult or undesirable to outsource KYC to a third party.
Where outsourced KYC is possible, significant economies of scale are expected with Asset Gateways sharing KYC/AML service providers.
When Asset Gateways register for service, they will stipulate the KYC smart contract, KYC level, and token operational rules as per above. They will also pledge native Ethereum collateral onto the blockchain, which will be time locked by the openANX DAO. This collateral serves to protect consumers; it can be released as the resolution of dispute resolution, to users of the gateway in the event of a credit event.
In the future, the time locked collateral could generate income for the DAO and asset gateways, through powering state channels or staking; however, this is purely speculative at the current time.
With the availability of transparent, locked collateral, and transparent token issuance, users can form quantifiable views on the creditworthiness of Asset Gateways. Note that the existing best practices are still recommended, i.e. Asset Gateways should hold customer funds in custody, in a non-fractional, audited manner. It does, however, offer a concrete and quantifiable means for users to price the credit risk.
Credit Risk Markets and Liquidity Aggregation
Pricing of credit risk is a key activity in any normal financial marketplace. In large institutional trading desks, each deal is broken up into smaller internal constituent deals; which some trading desks focus on pricing the market risk of some assets, whilst other trading desk focus on the credit risk. The profitability of a deal is then attributed to the credit and market risk desks individually.
The ability to trade credit risk is notably missing from current crypto markets. openANX will support “Credit Risk” order books. In this manner, an ANXUSD token can be traded against another gateway’s tokens (say perhaps AcmeUSD). For example, ANX may have a strong public brand, and high levels of collateral locked up in the DAO relative to issue tokens, whilst Acme has an unknown brand and low levels of collateral. The ANXUSD/AcmeUSD order book allows these two tokens to be traded against other, forming the basis for a credit risk trading market within the crypto marketplace. The pricing of these credit risks further provides users with another objective measure of counterparty risk.
Order books are opened by the DAO on the request of a sponsoring user. Often the Asset Gateway itself will sponsor an order book for its tokens, for example the ANX gateway would open an ETH/ANXUSD order book.
With the ability of Asset Gateways to register their tokens and sponsor their own order books, the barriers to entry for gateway operators will be significantly lowered. The introduction of openANX should see many new gateway operators entering the market, with varying levels of credit quality and jurisdictional/asset support.
Credit risk order books, trading gateway tokens against each other, will greatly improve price discovery to the market.
This situation by itself is better than the current landscape of centralized exchanges, as there will be greater competition and choice for users, with more transparent credit risk, and collateral pledged on the blockchain to provide a safety net in the event of a credit risk event or dispute.
It can be argued however that the biggest hurdle to entry for new exchanges is liquidity. Liquidity refers to the amount of traded assets available on the order books of an exchange. A highly liquid exchange could allow a large deal to instantly trade, whilst barely impacting the price. Liquidity has a strong network effect, as soon as one exchange or venue becomes the largest in terms of liquidity, it quickly attracts more liquidity until other exchanges cannot compete. This has arguably resulted in a small group of centralized crypto exchanges dominating the market place for a period of time, until such time as a legal, security, or credit event halts operations.
openANX overcomes this issue through the application of order book aggregation, coupled with credit risk trading books.
To consider the situation where there are three order books:
By themselves order books 1 and 2 reflect individual fragmented pools of liquidity. If there is an active credit risk order (i.e. book 3), matching logic call match trades by combining the three order books into a single order book with simple graph.
In this fashion, an active credit risk order book can transform small individual exchange pools of liquidity into a single large order book. This approach may at last bring about the liquidity network effect to turn a decentralized, open exchange into the dominant source of exchange liquidity.
The openANX User Journey
Users on openANX who are seeking to on-board fiat currency to the blockchain will initially require the services of an asset gateway. The availability of public credit risk and collateral metrics should assist users selecting an appropriate gateway.
The user can be expected to register through online services specific to each gateway, similar to the current situation with centralized exchanges.
Gateways in most jurisdictions will require some level of KYC and AML; the user will then be directed to such a service, either within the Asset Gateway, or to an external service provider if the Asset Gateway utilizes a third party provider.
Upon KYC/AML approval (if required by the Asset Gateway) the user may use the payment methods supported by the Asset Gateway to deposit funds. The Asset Gateway will then mint it’s own specific (at least partially collateralized) ERC20 tokens.
The user will then have the option of trading through a decentralized user interface provided by openANX (i.e. a Mist or Coinbase Token application) or trading their freshly minted token directly with any of the available ERC20 decentralised exchanges.
It is expected that the user will typically use the openANX trading interface, as the order book aggregation across multiple asset gateway tokens will allow access to a more liquid pool for the conversation of the token into ETH or other major cryptocurrencies available on the platform.
Eventually the asset gateway token holder can be expected to off-board their tokens back to real world assets. This is conducted by redeeming the token to the asset gateway through the openANX user interface, at which point they would be contacted by their asset gateway.User Journey
The technology platform to be delivered by openANX is as follows:
• A specification of the market operating model as described in the previous section
• Ethereum smart contracts to govern and operate the market as specified
• Integration with one or more exchange channels (notably Swap, Raiden, or 0x) to support matching
• API for each off-chain function integration (gateway, trading, KYC, order book registration, dispute resolution, DAO governance and upgrade)
• A standard, reference implementation user interface to allow account management and trading (it is expected the community will also provide additional user interface implementations as the platform is entirely open)
openANX (OAX) Bounty Program Launch and T-18 Days!
The weekend was incredibly busy and rewarding for us, with a lot of interest in the Project across social media.
This was further compounded by the launch of our bounty program over at bitcointalk;
or you can find the Bounty Program discussed in detail here;
We’ve had emails, calls and messages pouring in over the weekend from people interested in knowing more, getting behind the project, or even wanting to help. We’ve also opened and are running a few thousand people in groups over on WeChat. It’s an exciting time.
Over the weekend we also sat down with Chandler Guo, a member of the openANX team who is well known in China. We shot some videos, which was made extra difficult by the ever present construction that goes on in Hong Kong, and the fact that Guo 大哥 is a busy, busy man!
This week we will be launching a number of new languages for the white paper, shooting some videos outlining some aspects of the project in English and Chinese and getting ready for our trip to Chengdu next week, as well as speaking to the media about the project.
We’ll also be getting some SWAG ready, so look out for t-shirts and stickers!
Don’t forget to follow us on Twitter
Full steam ahead…