DeGate aims to be the best Decentralized Exchange built on Ethereum Layer 2, with a trading experience closer to that of a centralized exchange. This means higher capital efficiency, better market depth, and more reasonable token economics. Currently, in an era of high transaction costs, the Automated Market Maker (AMM) mechanism has gained market recognition due to its ease of use. However, with the implementation of Layer 2 and ETH 2.0, the cost of using the blockchain will be reduced by orders of magnitude.
We can better meet the essential needs of traders through order-book trading with higher capital utilization, which is highly likely to generate greater market demand. Based on this recognition, DeGate has adjusted the original development roadmap to prioritize the development and launch of order-book trading, with the ultimate goal being a product structure where order-book trading, AMM, and margin trading form the three key pillars of the DeGate exchange.
Understanding DeGate order-book trading
There are good reasons why the order-book model has not taken off in decentralized exchanges, compared to the AMM model:
1. The trading depth cannot compete with that of centralized exchanges.
2. Every pending and canceled order must be packaged on-chain, consuming gas fee.
3. The TPS of the infrastructure is limited, and the transaction matching response is not timely.
In view of this, DeGate hopes to bring users a smoother and more economical order-book trading experience with a uniquely designed Match Node model (Layer 3). We have also designed a unique economic incentive model to encourage Makers to take part in the system as liquidity providers. Our design goals are as follows:
- Instantly place and cancel orders: response time as fast as centralized exchanges
- Place & cancel orders for free: free to place and cancel orders without any fee
- Free for Maker: including trading fee and gas fee
- Direct trade for Taker: no pre-deposit needed
The following is an illustration of the transaction experience process from the user’s perspective, after completing the process of moving assets from L1 to L2:
- Taker (route 1 in the figure) does not need to deposit funds and can directly place a market order to complete the transaction on L2.
- Maker (route 2 in the figure) can place a limit order after depositing without waiting. The limit order will show in the order-book of exchanges immediately, and the transaction can be completed when Taker takes the order. No fee is needed for Maker for the whole process.
Main Features of the DeGate Architecture
The term Match node refers to a “Layer 3” specially designed by DeGate to optimize the user’s trading experience. It is responsible for placing orders, canceling orders, maintaining order-book, and matching orders during user trading. The matching results are generated into zero-knowledge proof and submitted to L2 for verification in batches eventually.
The design features of Match node are as follows:
- Priority given to large orders
In our design, the Taker in a transaction bears the trading fee and gas fee of Maker. If a Taker order is matched with multiple Maker orders at the same time, fees of multiple Makers will be paid by the Taker. Correspondingly, exchanges may also launch a dusting attack (since Makers place orders for free, attackers can launch massive amounts of dusting orders at low cost). To solve this problem, our matching engine will implement a large order priority strategy. The order with the largest initial amount will be matched first among orders at the same price.
- Order canceling compatible with off-chain & on-chain processing
The operation of canceling orders is processed in Match node by default without any fee, but some users may be concerned about the hidden dangers of centralized processing (for example, the Match node could be malicious and discard users’ canceled orders). Therefore, the feature of directly canceling orders onchain is also provided by the protocol.
- Prevent Front-running
There is a possible situation where a user learns in advance that his order is matched through the API interface of the Match node or Mempool pre-run, and initiates a withdrawal or unapprove operation before zero-knowledge proof containing the matched transaction is settled on the chain, thereby causing the transaction to fail due to insufficient user’s assets. To avoid such attacks, DeGate adds checkpoints to Match node and adds a design for delayed withdrawal.
- API calls and open protocols
The functions of Match node can be called through API like centralized exchanges so that third parties can deploy and develop their UI interface and focus on user operation without caring about the underlying implementation details. Furthermore, third parties can deploy and operate their own Match node independently in the future. We believe that this development policy will make the DeGate protocol more robust and open.
Zero-knowledge proof is a method by which the prover can convince the verifier that a certain assertion is correct without providing any useful information to the verifier.
In general, each node performs the same computation for each transaction in the block and verifies whether their results are consistent with the results of other nodes in a blockchain system. In other words, each transaction on the chain will be executed by each node, which is one of the main reasons for the relatively low performance of the blockchain. We do not need to recalculate every time to verify the transaction, and it would effectively improve the performance of the blockchain if the calculation only occurs once for a single transaction, and each other node only performs the verification, when the verification cost is much lower than the calculation cost. Zk Rollup is using ZK-SNARK technology, which is essentially a technology that can significantly reduce the verification cost, generally by several orders of magnitude compared to the calculation cost (from linear to constant or logarithmic).
Based on this same idea, Match node also generates the batch results of the off-chain order matching into zero-knowledge proof, which is passed to L2 for verification. This is expected to reduce the network cost on L2 by more than 10 times.
Super conduct channel
Arbitrage trading is ubiquitous in a decentralized world, and arbitrageurs can quickly reduce the price difference between different protocols once they find profit margins. DeGate hopes to use what we term a super conduct channel to bring trading fees of arbitrage transactions between order-book transactions and AMM transactions close to zero. For arbitrageurs, this makes arbitrage between DeGate protocols more competitive than between third-party protocols, and for ordinary users, they will also get better capital utilization and market depth.
DeGate will prioritize the use of proven market strategies, including:
- Order-book Liquidity Mining: DG tokens are only rewarded to Makers who complete transactions in proportion.
- Liquidity Mining for AMM: DG tokens are rewarded to liquidity providers according to industry standards in liquidity mining.
- Referral program: UI providers such as KOLs and User Interfaces by wallet providers are rewarded with trading fee rebates and DG tokens in the initial bootstrapping phase.
Looking Ahead to a secure, low-cost Decentralised Exchange with order book function
Against the backdrop of a fast-developing Ethereum Layer 2 and ETH 2.0 ecosystem, DeGate will work with the community to focus on the essence of transaction and user experience, continue to empower the Ethereum ecosystem, lower the threshold for mainstream users to conduct decentralized transactions, and enable the technology and concept of blockchain to serve a wider range of people.