The crypto sphere saw, in 2021 and 2022, massive capital influx: in part due to impressive user growth, but also due to institutional investments chasing this rising cryptocurrency trend. If it wasn’t already the case, the crypto world truly became a bona fide industry, complete with billion-dollar institutions, and fiduciary responsibility over trillions of dollars from its biggest centralized players. Following this new landscape, as the night to day, came the interest of regulators and government bodies. Unfortunately, much of it is still to come.
For this reason and others, a lot of people enamored by cryptocurrency’s initial promises — an uncompromising, radically privacy-focused marriage between the internet and mediums of exchange — have found themselves compelled to retreat from nearly all currently existing crypto assets. What we now call “privacy coins” began to show themselves as one of the only shelters to existing and looming regulations (the ‘privacy’ distinction here is even ironic, as it is clear as day that “a peer-to-peer electronic cash system” would need to confine itself to the decisions of two peers and two peers only, with no inherent access or need for third parties to meddle with the decisions of those two peers). This, of course, is only half the battle: where and how those privacy coins are to be traded is also at issue.
Regulation and Privacy-Preserving Assets
Monero, Dash, Particl, Firo and other privacy coins are spearheading many technologies in the ever-evolving domain of cryptic currency. With them, anonymous transactions, at least to people that understand the initial vision, established themselves as a necessary component of Satoshi’s famous whitepaper. And by extension, uncompromisingly anonymous exchanges also revealed themselves as necessary for said transactional privacy to take on any meaningful form.
Trading exchanges, where most of the liquidity lies, are increasingly being coerced by government regulations, enabling them to become highly regulated men-in-the-middle of most trades. This is obviously anathema to the original cypherpunk vision of privacy coins and cryptocurrency in general — still, to this day, most privacy coins are traded on centralized exchanges. This is a fatal compromise on the very concept of private currencies, and a critical liability for privacy technology; indeed, centralized exchanges are positioned in such a way as to defer to government regulations in order to subsist and thrive, which will inevitably create geographic discrimination and roadblocks for hyper-private cryptocurrency technologies, such as ring transactions and zero-knowledge proofs, and their various applications.
To perceptive observers, KYC crackdowns on those exchanges are coming, notably through overreaching and innovation-killing regulations from the US and the EU, and any type of centralized alternative is only kicking the can down the road. To this point, it increasingly seems like events of the past year opened the eyes of many.
The question of liquidity is also to consider within this kind of hyper-private, decentralized ethos. Well-populated, centralized exchanges and order books are the norm, and for a long time were considered necessary for mass adoption. This, of course, lent itself to disasters, such as the FTX debacle, the BTC-e shutdown, the BitFinex hack, and others. Most cryptocurrency users came to understand this the hard way: although decentralized exchange adoption is still lacking, it seems “holding your own keys” is now more ingrained into the crypto psyche than it ever was.
Hyper-privacy and the AMM Model
Another noteworthy, but often overlooked, compromise on total privacy and resilience is the current (some say, inherent) state of automated market makers, or AMMs. AMMs are essential to the vast majority of currently existing DEX exchanges and bring us one step closer to leaving custodial solutions behind for good. However, they are not without flaws: impermanent losses and associated fees are commonly cited, but AMM-based models actually have to contend with many potential vulnerabilities, with regard to both security and privacy.
From a security perspective, smart contracts and the complex collaborations between them can, of course, lead to potential protocol vulnerabilities. BSX, by design, opts for “lower-level” alternatives to smart contracts deemed safer, such as scriptless scripts and adaptor signatures. On the other hand, AMM liquidity pools often make heavy use of smart contracts, which have in the past made them targets of malicious attacks such as reentrancy attacks, among many others. Reentrancy attacks occur when a trusted smart contract makes an external call to a separate, untrusted smart contract, in order to exploit a potential bug in the code which would allow it to drain or manipulate smart contract assets. This can have devastating effects on targeted liquidity pools, and by extension to AMM liquidity providers - the Siren protocol, which was victim of such a hack in 2021 to the tune of $3.5 million dollars, is merely one example out of many.
Other security contingencies that AMM liquidity providers have to contend with include oracle attacks, block timestamp manipulation, and the infamous rug pulls that have become far too common. The semi-centralized aspects of AMMs, especially AMMs powered by in-house tokens such as Sushiswap or PancakeSwap, also amount to a security flaw in some respects, as the only way to ensure that liquidity providers on AMMs are consistently profitable is often by counteracting losses with heavy, hyper-inflationary financial incentives in the form of newly created native tokens.
Potential privacy vulnerabilities within AMM models are also to be considered. It is absolutely necessary for the BSX protocol to be entirely impervious to blockchain analysis and identity tracing, which is a potential liability that most AMM-based DEXs, even ones that rely on standard atomic swaps, have to contend with. To that end, BSX employs adaptor signatures to allow for completely hidden atomic swaps, without any sort of matching hashes on participating blockchains, thus preventing any sort of analysis or linkability of transactions over time. In combination with that, BasicSwap’s type of order book, where one can pick and choose offers instead of having to follow bid and ask curves, provides a user experience that is similar to that of centralized exchanges but ensures total obfuscation of what is being traded and when. This ensures that the protocol is highly resilient against analysis, including identity tracing and behavioral model inference.
It is also worth noting that “DEX” exchanges that are confined to one chain, or its clones (via “bridges”), also come with their own fatal compromises on absolute privacy and security, as exemplified by critical vulnerabilities discovered in November of last year.
Community Liquidity with BasicSwap
The above considerations weigh heavily in the protocol design of BasicSwap, especially with regard to encouraging liquidity within the network without sacrificing security or privacy. BasicSwap, a free and completely cross-chain decentralized trading protocol using a novel implementation of atomic swap-based trading and the SMSG network, is meant as a zero-compromise alternative for private peer-to-peer trades - that means a lot of liquidity solutions available for other decentralized exchanges, even ones with an eye for privacy, are rejected by BasicSwap as privacy compromises on one level or another. Providing liquidity responsibly and safely has traditionally been one of the bigger challenges for trustless exchanges between peers, and while solutions do exist and will no doubt continue to be built and improved upon, they must ultimately satisfy a strict list of criteria in order to fit with the end goal of the BasicSwap protocol.
To this end, BSX also opted for an entirely user-supported and distributed orderbook-like format for trades, similar to what is typically seen on centralized trading exchanges, minus the centralized, intermediated aspects. This hardline, no-compromise approach is by design; whenever you trade Monero, Particl, PIVX, Dash, or other coins on BSX, not only do you help yourself by becoming more resilient against the possible threats that centralized exchanges and AMM DEX solutions bring, but you also do your part in improving the blockchain’s resilience against tracing attacks of all kinds. Simply by deciding to trade your crypto on such an exchange, you make privacy coins and their ecosystems more private and more unstoppable, by leaving no trace behind.
That is why we invite you, if you care about privacy as we do, to spread the word about BasicSwap and the existential issues that centralized and AMM DEX solutions bring to uncompromising privacy and security. It is free to use, open source, does not rely on native tokens, and involves absolutely no KYC or account requirements — this arrangement offers only advantages for both you and the networks of the coins you’re trading.
Every little bit helps, and we can all be a big part of this fight for our freedoms and privacy. Even if this seems like a small step to you, bringing even one person to trade their privacy coins on a decentralized exchange like BSX can have a profound impact!
If you would like to deepen your understanding of atomic swaps and their new, hyper-private type powered by Adaptor Signatures, make sure to give these following articles a read!
- The DEX Revolution Pt. 1
- The DEX Revolution Pt. 2
- The DEX Revolution Pt. 3
- Bidirectional Monero and PART (Anon) Atomic Swaps
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