IDEX Exchange

Nick Sawinyh on 19 Mar 2020

Alex Wearn told us about hybrid model DEX challenges, regulation, backstory, and what’s coming next for IDEX.

Hello! What’s your background, and what are you working on?

Hi everyone, my name is Alex Wearn, and I’m the CEO of IDEX. I’ve spent my career in software development, primarily in product management roles at companies like Amazon, Adobe, and IBM. I’ve tried to bring a user-first product lens to all of the work we do here at IDEX.

I first got introduced to crypto via a Wired article in 2011 titled “The Rise and Fall of Bitcoin” (the price went to $28 and back down to $2). I have a background in Economics, and at first dismissed it based on the traditional well-worn criticisms (it wasn’t backed by anything, deflationary currencies don’t work, etc.). I eventually bought my first bitcoin in 2013 and went down the proverbial rabbit hole, reading and learning constantly and excited by what this could mean for the future.

We started our first entrepreneurial endeavors in crypto with the launch of Ethereum. My co-founder, Phil, was a co-founder of EtherEx, a fully on-chain DEX and one of the very first products being built. We teamed up in 2016 to work on Decentralized Capital, a fiat-backed stablecoin operating on Ethereum (we were right but early), but pivoted back to the DEX focus in 2017 and towards the end of the year launched IDEX. It’s been a wild ride ever since.

IDEX is a non-custodial exchange that integrates with any custody solution and allows users to trade with one another without giving up control to a third-party custodian. IDEX is unique compared to other DEXs in that it employs a hybrid model, where the majority of the exchange is operated by IDEX, and the blockchain is only utilized for custody and settlement. This allows us to solve some of the UX issues that exist in more decentralized models, including things like front-running and on-chain order collisions.

For the last year, we’ve been working on IDEX 2.0, a new version that seeks to solve the remaining UX and scaling issues that exist on DEXs. Our goal is to create a non-custodial exchange that has the same user experience as a centralized exchange, eliminating the choice that users have to make today between functionality and fund safety.

What’s IDEX backstory?

When Ethereum was first announced, one of the things that the community naturally became excited about was a decentralized exchange. Mt. Gox was fresh on everyone’s minds, and people were captivated by the concept of an exchange that didn’t require third party custody.

My co-founder started the earliest implementation of a DEX known as EtherEx. This fully on-chain model had some of the same issues that exist on other DEXs, in particular latency and high-network costs arising from the fact that all actions are on-chain.

This experience served as the insight for our hybrid model, which we began working on at the start of 2017. Our initial idea was to improve upon the EtherDelta off-chain order book design by pruning the order book whenever a transaction showed up in mempool. However, we quickly realized that we could provide even better guarantees by routing all transactions through one dispatch system, creating the “real-time” trading coupled with on-chain settlement.

At the start, we were just a team of three (really 2.5, I was still working my day job at Amazon), and we were primarily self-funded. It took us about six months of focused development to get from initial design to working implementation on the mainnet. We launched in October of 2017, and after a few months of targeted marketing efforts, we became the number one DEX/Dapp on Ethereum.

What went into building the IDEX?

The primary technical challenge was figuring out how we were going to support the hybrid model. We tried to be pretty ruthless with our initial feature set, given the small team size. Obviously, you need certain things that are key components of an exchange, like a trading UI, charts, etc. Those had to be shipped with the initial product. We were also very concerned about security, and spent a lot of time testing and reviewing the smart contract. The pieces we postponed until later were largely operational infrastructure. Like many projects, we started out using Infura, and we waited until after launch to build the monitoring/tooling to help us operate the platform.

During the past 12 months, we’ve taken everything we learned from building and operating the first version of IDEX and used it to build the next generation of non-custodial exchange, IDEX 2.0. IDEX 2.0 is more than an upgrade, it’s a complete rewrite and a new class of product: high-performance, non-custodial. The design addresses three major flaws in the current version:

  • Settlement costs/lack of scalability - IDEX 1.0 traders have paid more than $5M in gas costs to settle their trades. The new version reduces these costs by over 99% by using an in-house layer-2 design, Optimized Optimistic Rollup (O2R).
  • UI/UX - Signing delays in tools like Metamask and ledger led to issues with guarantees of off-chain execution. IDEX 2.0 introduces a central limit order book (CLOB) and matching engine that addresses this and other UX problems.
  • Off-chain performance and throughput - In addition to introducing a proper CLOB, we’ve also upgraded the off-chain performance to match top-tier centralized exchanges.

When IDEX 2.0 launches, users will have access to both the performance of a centralized exchange and the security of smart contract-based custody and settlement. We’re quite excited by this because, for the past few years, we’ve heard criticisms that non-custodial exchanges will never be able to compete with centralized exchanges. We’re close to having a product that we believe really puts that claim to the test.

What’s your business model?

IDEX takes a fee on both sides of the trade, 10 bp from the maker, and 20 bp from the taker. As the volume on the exchange grows, so does our revenue.

The current version of IDEX (1.0) had a lot of success by focusing on new projects. We became known as the place for projects to list first, largely thanks to the operational advantage we had for listing new assets. Over the past few years, we’ve seen this decline, and in late 2018 we identified a need to focus on higher volume, more established markets, and derivatives on these markets.

The challenge with serving those markets is that they are already well served by centralized exchanges. We realized that the current design couldn’t compete to attract significant liquidity and volume.

This is our focus with IDEX 2.0—to address the scalability issues and enable further growth in these markets. The goal is to peel off customers who like the centralized exchange trading experience, but don’t want to risk their funds. This is very different from many other DEXs, in particular the swap DEXs that are focused on tight integrations with other DeFi projects.

Another key component of our business model is the IDEX staking network. Stakers lock their tokens in a dedicated address and run the IDEXD staking program, which helps operate the infrastructure of the IDEX exchange. Stakers earn 25% of the trade fees (50% in IDEX 2.0) from IDEX for their role in helping run the platform.

There are a couple of unique characteristics that we think make our model more sustainable.

  1. IDEX staking is funded entirely by transaction fees rather than inflation. Yields are typically around 10-15% and are sustained by usage of the underlying network rather than issuing new tokens.
  2. Stakers are paid in ETH rather than the native token. Using an asset with its own demand and liquid markets means that IDEX and its tokens are unaffected when node operators cash out to cover infrastructure or tax costs.

At this time, we have almost 300 individual nodes in operation. Our goal is to lean on this network to not only further decentralize components of the platform, but also to incentivize market makers, traders, etc. to participate in the IDEX ecosystem. While centralized exchanges give lip service to community ownership via their tokens, IDEX is actually delivering on this promise.

What’s your position on the regulatory landscape today?

We believe that regulators, at least in the US, have been clear about what they expect from non-custodial platforms like IDEX, and we’ve taken steps to align with these expectations. This includes the introduction of KYC/AML policies.

Going forward, we expect that more DeFi products will have to deal with these challenges. We’re excited by the prospect of a more robust blockchain identity system. We believe something like this is necessary for DeFi to continue to grow so that addresses and smart contracts can interact directly with each other while still giving operators the required information to comply with regulations.

What are your goals for the future?

Our primary focus in the short term is launching IDEX 2.0. We’re a few months away from the launch of the new version. The system is working end-to-end, and you can check out a testnet demo by going to demo.idex.io. We’ll be releasing more updates to the demo, including our new API and staking system, as we get closer to mainnet launch.

What are your future thoughts for the DeFi market?

I think the future of cryptocurrencies is bright. I’m excited to see all of the experimentation in DeFi, in particular projects that build on the success of others and take advantage of the composability. One area that is particularly interesting is the rise of synthetic assets. This is a unique approach to giving users exposure to the price action of assets that aren’t native to the underlying network. The combination of synthetic assets and IDEX 2.0 will allow users from around the world to gain exposure to traditional asset classes on a top tier exchange—assets that until now have only been available to citizens of the first world.

I’m also excited by some of the non-trading use cases in crypto, and I believe we’ll continue to see more products that involve the technology but where the technology itself is not the focus.

Where can we go to learn more?

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About the author
Nick Sawinyh
Nick Sawinyh is an LA-based crypto entrepreneur. After having spent over four years in the blockchain industry, Nick founded DeFiprime in 2019, with the idea to provide information about emerging DeFi ecosystem. He owns modest amounts of various cryptocurrencies.

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