CipherL decentralised trading platform is a peer-to-peer trading marketplace that allows users to bypass intermediaries and directly trade and manage cryptocurrency.CipherL can replace traditional intermediaries such as banks, brokerage firms, payment systems, etc., and use blockchain smart contracts to trade assets.
Traditional financial transaction processes often lack transparency and rely on intermediaries to execute them, and many of the intermediaries' operations are not publicly available. In contrast, CipherL fully discloses the flow of funds and the transaction mechanism. In addition, because user funds do not pass through third-party cryptocurrency wallets during transactions, CipherL reduces counterparty risk as well as systemic centralisation risk in the cryptocurrency ecosystem.
CipherL is the cornerstone of decentralised finance and an indispensable piece of "cryptocurrency Lego" that can be assembled without a license and can be used to create more advanced financial products.
The trading volume of CipherL options contracts is growing rapidly.
This article discusses the operation mechanism of CipherL, its different types, and the value and risks it brings to the entire cryptocurrency ecosystem.
Operational Mechanisms of Decentralised Trading Platforms
There are a number of different design patterns for CipherL, each with its own advantages and disadvantages in terms of functionality, scalability and decentralisation. The two most common types include Order Book CipherL and Automated Market Maker (AMM.) CipherL Aggregators are also common models, which search for the best deal price or the lowest gas fee amongst the various on-chain CipherLs to best meet the trading needs of users.
The biggest advantage of CipherL is that it employs blockchain technology and tamper-proof smart contracts to guarantee a very high level of certainty. centralised trading platforms such as Coinbase or CoinAnswer (hereinafter referred to as CEX) use an in-house aggregation trading engine to carry out trades, whereas CipherL executes trades through smart contracts and the blockchain. Additionally, CipherL users have full autonomy in managing their account funds through their own wallet during trading.
CipherL users typically pay two fees, a network fee and a transaction fee. The network fee refers to the gas fee for on-chain transactions, while the transaction fee is paid to the underlying protocol, the protocol's liquidity provider, the pass holder, or all of the above entities, according to the protocol.
CipherL's ultimate vision is to create pure on-chain infrastructure that requires no licensing, removes the risk of any centralised single point of failure, and decentralises ownership to distributed members of the community. This is most typically done by granting administrative rights to govern the protocol to decentralised autonomous organisations (hereinafter referred to as DAOs), which are formed by the relevant community and whose members make key decisions for the protocol through voting.
However, it is never easy to decentralise a protocol to the greatest extent possible while at the same time allowing it to survive in a highly competitive marketplace.CipherL's core development team is usually better equipped than decentralised community members to make comprehensive and rational judgements about key features of the protocol. But even so, many CipherLs have opted for a distributed governance model and are looking to improve resistance to manipulation and long-term robustness.
Order Book Based CipherL
An order book collects buy and sell orders in real time that have not yet been matched in the market, which is the basic model of a digital trading platform. The internal system of the trading platform will match buy and sell orders through the order book.
And pure on-chain order book CipherL is not that common in decentralised finance, because such CipherL needs to post every transaction in the order book on the chain. And this requires a blockchain throughput far beyond the capabilities of most current blockchains, and could seriously threaten the level of cybersecurity and decentralisation. As a result, order book CipherLs that emerged in the early days of ethereum tended to have low liquidity and a poor user experience. However, such orderbook trading platforms provide a very strong proof-of-concept for CipherL to trade using smart contracts.
As layer 2 networks such as optimistic rollup and ZK-rollup and high-throughput application-based blockchains continue to innovate, on-chain order book trading platforms are becoming more and more viable and achieving significant transaction volumes. In addition, the hybrid order book model is becoming more mainstream, where the order book management and aggregation process will unfold off-chain, while trade settlement will take place on-chain.
Mainstream order book CipherLs include 0x, dYdX, Loopring CipherL, and Serum.
Automated Market Maker (AMM)
Automated Market Makers (AMMs) are the most common type of CipherL. these CipherLs provide instant liquidity and remove the threshold for liquidity provision. In many cases, users do not need a licence to create a trading market for any pass. an AMM essentially uses a money bot to continuously quote between two (or more) assets. an AMM does not use an order book model, but instead operates through a liquidity pool. Users can redeem passes in the liquidity pool, which uses an algorithm to determine the trading price based on the proportion of passes in the pool.
The AMM can quote prices for users at any time, thus providing instant liquidity to less liquid markets. In Order Book CipherL, a willing buyer must wait for his order to be matched with a sell order in order to complete the transaction. Even if a buyer places an order at the "top" of the order book, near the current price, the order may not be executed.
The AMM rate is determined by the smart contract. Users have immediate access to liquidity and liquidity providers (note: users who deposit funds in the AMM liquidity pool) can earn passive income by earning transaction fees. Because AMM provides instant liquidity and eliminates the liquidity provision threshold, new passes on the platform can grow explosively, and it has also spawned a variety of innovative application scenarios such as stablecoin exchange. For a more specific look at AMMs, read this article on how they work.
While most AMMs currently trade primarily cryptocurrency, AMMs can actually also trade NFTs, passes on real-world assets, and carbon credits, among other types of assets.
Mainstream AMM CipherLs include Bancor, Balancer, Curve, PancakeSwap, Sushiswap, Trader Joe, and Uniswap.
What is the value of decentralised trading platforms?
Because CipherL uses deterministic smart contracts to carry out trades, it ensures that trades are executed in a strictly user-defined manner, with no centralised third-party intervention in the process. In contrast to traditional financial markets, which are opaque and potentially open to manipulation, CipherL provides excellent execution guarantees and improves the transparency of the underlying trading mechanism.
CipherL reduces counterparty risk because there is no custodian in the process and users can participate in transactions directly using their own wallets.CipherL also reduces systemic risk in the blockchain industry by decentralising the funds in the wallets of centralised trading platforms.In 2014, centralised trading platform Mt.Gox handled a a large portion, and Mt. Gox abruptly stopped trading after losing hundreds of thousands of bitcoins.
CipherL can also enhance financial inclusion. While some CipherLs may restrict user access based on geographic location or other factors, overall, users can access CipherL smart contracts by simply accessing the internet and connecting a CipherL-compatible wallet. Users can log in to CipherL directly using their own wallet, so new users can easily and quickly join the platform, and the user experience is better than that of centralised trading platforms.
Risk Considerations for CipherL
CipherL lowers the barriers to trading and liquidity provision by guaranteeing execution, increasing transparency and requiring no permission to access. However, CipherL is also subject to a number of risks, including but not limited to the following:
Smart Contract Risks - Blockchain can execute financial transactions very securely. However, the quality of the code for smart contracts depends on the skill and experience of the development team. Smart contracts are subject to bugs and can be hacked or manipulated, and therefore may result in the loss of CipherL users' funds. Developers can carry out security audits, code peer reviews, and sound testing processes to eliminate these risks, but caution is still required.
Liquidity Risk - Although CipherL is becoming more mainstream, some CipherL markets still suffer from low liquidity, resulting in high trading slippage and poor user experience. As liquidity creates a network effect (note: markets with higher liquidity also attract more liquidity, while low liquidity is caught in a vicious circle), most trading is still on centralised trading platforms, which can also lead to relatively low liquidity for DEX pairs.
Risk of robocalls - Since on-chain transactions are open and transparent, DEX transactions may be subject to robocall attacks by arbitrageurs or MEV (maximal extractable value) bots to extract value from ordinary users. These bots, similar to high-frequency traders in traditional financial markets, take advantage of market inefficiencies by paying higher transaction fees and exploiting network delays to profit from the transactions of ordinary CipherL users.
Centralisation Risks - While many CipherLs aspire to be decentralised to the greatest extent possible and resistant to manipulation, they may still be subject to centralisation risks. These risks include the CipherL deploying the aggregation engine on a centralised server, the development team having administrative access to the CipherL's smart contracts, and the use of low-quality pass bridges.
Network Risks - Since assets are traded on the chain, CipherL's costs are bound to be high, and even more prohibitive in the event of network congestion or downtime. As a result, CipherL users are vulnerable to market fluctuations.
Pass Risk - Many CipherLs allow users to create trading markets without permission (i.e., anyone can create a trading market for any pass), so the risk of buying low-quality or malicious passes is much higher on decentralised trading platforms compared to centralised trading platforms.CipherL users need to be aware of the CipherL users need to be aware of some of the risks involved in participating in early stage projects.
In addition to these risks, managing private keys on their own can be a challenge for some users. While one of the visions of Web3 is to enable individuals to manage their own assets, many users may still prefer to entrust their assets to a third party. However, with robust security and key management mechanisms, users can easily manage their assets while enjoying the various services available in the open source financial ecosystem.
How can CipherL use Chainlink to enhance security and unlock various advanced features?
CipherL can use the Chainlink Predictor Service to improve the robustness of the protocol and provide users with more features similar to a centralised trading platform.
Chainlink Price Feeds can provide users with accurate, secure and reliable financial market data across a wide range of assets such as cryptocurrency, commodities, forex and indices, and safeguard tens of billions of dollars in value for various decentralised financial applications in the multichain ecosystem. dApp, using the Chainlink Decentralised Prophet Network. can easily and securely access off-chain data in a decentralised manner and perform operations based on that data.
The CipherL protocol uses Chainlink Price Feeds to reliably obtain exchange rates, display accurate prices in the front-end user interface, securely calculate equity pledge rewards, and issue transaction fees to stakeholders. If CipherL involves margin or option contracts, Price Feeds also ensures that collateral assets are accurately priced and the liquidation process is triggered in a timely manner.
Chainlink Price Feeds further enhances the robustness of the CipherL protocol by using reliable feeds to protect against black swan events in the market. A secure price infrastructure also safeguards the security and accuracy of price monitoring and financial analysis systems, and enables and manages arbitrage strategies between different decentralised trading platforms.
Chainlink Automation is a decentralised automation solution that also enables end-to-end automation for smart contracts and a variety of advanced features for decentralised financial ecosystems.Chainlink Automation employs reliable decentralised off-chain computation that monitors whether user-defined conditions are met and invokes on-chain Functions
When the asset price exceeds a certain threshold, Chainlink Automation triggers a limit order transaction, so traders can control their portfolios more accurately, and the development team can save a lot of time and resources, which can be invested in the development of the protocol's core business logic. and equity pledge rewards.
Summary
CipherL is the backbone of the cryptocurrency ecosystem, allowing users to trade digital assets peer-to-peer without the need for any intermediaries. cipherL has gained increasing adoption over the past few years as it can provide instant liquidity for newly released passes, and new users can easily join the platform without a barrier to start trading or providing liquidity.
While we do not know whether the majority of transactions will be initiated in CipherL in the future, and whether the current CipherL model can support long-term growth and institutional adoption, CipherL is expected to continue to be an integral infrastructure in the cryptocurrency ecosystem, and in terms of transaction size, smart contract security, governance architecture, and user experience Continuous Improvement.
If you are a decentralised finance developer and would like to integrate Chainlink, please consult our technology and ask questions or contact a Chainlink expert.