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How Jack Dorsey’s tbDEX differs from decentralized exchanges

How Jack Dorsey’s tbDEX differs from decentralized exchanges
Jack Dorsey  |  Photo Credit: Reuters
22 Nov, 2021

Jack Dorsey’s Square has finally released the whitepaper for its upcoming decentralized crypto exchange, shedding some light on what this new exchange will look like.

“We believe that the economy should be inclusive. We need to build on-ramps to this future where everyone can access and participate in the economy,” the company said in a statement on its website. “In order to achieve this, the nature of financial institutions needs to evolve. We can either embrace this change — by investing in this future as a public good by rethinking our business models and ways to create value — or we can let this future happen to us,” it added.

The product is called tbDEX and though it is decentralized in some ways, it’s not the trustless system that some would have expected. But before we get to the differences, here’s what makes it a decentralized exchange (DEX).

How is tbDEX a trustless system?

In traditional exchanges, including the likes of WazirX, CoinDCX and CoinSwitch Kuber, the user is trusting a central “custodian wallet”, which is owned and operated by the exchange itself. When users transact on a crypto exchange, the actual cryptocurrencies are held in this wallet, and the exchange is basically maintaining a ledge of who owns how much or what token.

On tbDEX, and on any other DEX, people will retain access to their crypto wallets and own their tokens. Transactions will happen directly between users’ wallets, and without the intervention of a central wallet.

How does tbDEX differ from other DEXs?

In most DEX platforms, trust between transacting parties is established by using smart contracts. The crypto assets to be traded must be submitted to a smart contract, which executes the transaction once the required criteria have been fulfilled. And thus ensures that the two parties can trust each other, and the platform doesn’t have to verify these users through know-your-customer (KYC) forms etc.

On Dorsey’s tbDEX though, the company is going to use a messaging protocol, which allows traders to establish trust between themselves. So, while people won’t have to depend on a company to hold their crypto and facilitate transactions, they won’t have the safety of algorithms either.

A smart contract makes sure that no one can tamper with transactions, but a messaging protocol leaves it up to users trusting each other.

What is tbDEX’s take on anonymity?

Along with the messaging protocol, users and experts have pointed out that tbDEX isn’t taking the same approach to anonymity that DEXs usually do. The fact that transactions happen across wallets usually means that people can hide their real identities on DEXs. Instead, the tbDEX whitepaper says it will develop ways for users to perform KYC and prove their identities as well.

“The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous,” the whitepaper says.  “The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone. This is similar to the level of information released by stock exchanges, where the time and size of individual trades, the ‘tape’, is made public, but without telling who the parties were,” it added.

Square’s exchange will also incentivise users to share more information about them. Higher the anonymity one requests, more will be the transaction fees involved in a transaction.