The Defiant

What is IDEX?

A Primer on a Hybrid DeFi-CeFi Exchange

By: Rahul Nambiampurath Loading...

What is IDEX?

IDEX is a cryptocurrency exchange that combines elements from centralized and decentralized systems.

On one hand, IDEX offers self-custody, a core tenet of DeFi. On the other hand, IDEX has CEX features that makes token swapping faster due to deeper liquidity and optimized match-making.

Launch

Launched in 2017, IDEX is a self-styled “high-performance decentralized exchange.” IDEX says it has zero failed transactions and no front-running. Up until 2018, one could consider IDEX to be a decentralized exchange (DEX). Nonetheless, that went out the window in November 2018, when IDEX went full know-your-customer (KYC), requiring user ID.

“Decentralization exists on a spectrum, and unless your system or application lacks any centralized parts it can be subject to regulation. In addition to IP blocking, IDEX will be implementing KYC/AML policies in order to comply with sanctions and money laundering laws.”

With the privacy aspect removed from the DEX attraction, IDEX was left with self-custody and easier access to fresh altcoins that are not yet listed on bigger exchanges like Binance or Coinbase.

Source: IDEX

On the upside, if one doesn’t register an IDEX account, users can still connect to the exchange without KYC with their non-custodial wallets like Block Wallet, just as with any other dApp.

IDEX supports three blockchain networks — Ethereum, Polkadot, and Binance Smart Chain (BSC). Like other DEXs, IDEX supports the exchange of hundreds of cryptocurrencies.

How Does IDEX Work?

DEXs like Uniswap typically employ automated market makers (AMMs) to match and execute users’ order requests. They do this by managing liquidity pools. These smart contracts allow users to deposit specific token pairs, such as USDC/ETH. When traders want to exchange one for the other, they then tap into those user-provided liquidity pools.

IDEX also follows this model in that users can add liquidity to receive liquidity provider (LP) tokens, earning 0.2% on all trades.

Source: IDEX

Nevertheless, IDEX departs from the AMM model by using Hybrid Liquidity (HL), which combines traditional order book with AMM’s liquidity pools. In practice, this combo translates to automatic matching of users’ trades from both limit orders and AMM’s liquidity pools.

Additionally, this liquidity management system automatically sorts gas fee rates to optimize exchange cost reduction and eliminate failed trades.

Specifically, users pay transaction fees directly to execute trades on IDEX’s smart contracts. So, gas fees for all other sub-actions, such as withdrawals, adding or removing liquidity, or trading, are simply deducted from the account’s balance.

With this preemptive Hybrid Liquidity, it is impossible for there to be failed transactions.

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Furthermore, both deposits and trades are executed centrally and off-chain on IDEX’s own infrastructure. In turn, only trade settlements are executed on-chain. Thanks to this hybrid model that skirts around slower decentralized roads, IDEX has earned a reputation of a fast exchange because users can make trades indefinitely and instantly until they are executed on-chain.

Whenever a user deposits funds, IDEX opens a channel hub. Each transaction is equal to a trade on the channel, which is instantly closed upon completion. IDEX then verifies if the transaction is authentic and updates the off-chain state before sending it on-chain.

Infographicaly, this interaction between users’ liquidity pools, IDEX infrastructure, and Ethereum, looks like this.

Source: IDEX

Due to IDEX’s instant, channel-based execution, there is also no possibility of front-running. Typically through bots, front-running is scanning pending transactions and then paying much higher gas fees for validators to process these transactions first, giving the front-runner a trading advantage.

At the end of 2021, IDEX further improved its token-swapping performance by integrating Ethereum’s Layer 2 scalability solution — Polygon — which brought down trade fees to a minimum.

With that said, IDEX’ hybrid model still doesn’t make it possible to buy Bitcoin as one would on a fully centralized exchange like Kraken. Instead, like other Ethereum-centric DEXs, users can buy wrapped Bitcoin, which holds the same value as BTC but as an ERC-20 token.

IDEX Token

As previously noted, IDEX incentivizes liquidity providers with LP tokens, which is the exchange’s native token — IDEX. There is a total supply of 1B IDEX. Users can farm IDEX tokens on either single or dual rewards farms.

Dual rewards farms pay out rewards in more than one token, while single reward farms allow staking across a wide range of IDEX reward multipliers, from 0.25x to all the way up to 4x.

Source: IDEX

When users stake IDEX tokens, they also receive rewards as 50% of trading fees. To scale up further for future crypto adoption, IDEX allows users to stake at least 10,000 IDEX to run Replicator nodes. These nodes deliver IDEX API data to market makers, algorithmic traders, and researchers as advanced IDEX users and exchange providers.

Launched in December 2020, Replicator nodes run a lightweight client that offers real-time access to IDEX order book data.

IDEX’s 1B token supply is finite, which means their value will not be devalued with gradual inflation, outside of those that are still unlocked As of November 2022, 67% of IDEX tokens are in circulation.

IDEX History and Funding

Brothers Alex Wearn (CEO) and Philip Wearn (COO) deployed IDEX in 2017, with version 2.0 having launched in fall 2020. Alex has an MBA in design and innovation with a second degree in product and process design. He had previously worked at Amazon, IBM, and Adobe.

His brother Phil is an entrepreneur with a degree in astronautical engineering. Phil has a dual job, as both COO at Aurora Labs and as COO of IDEX. Aurora Labs is behind Aurora, aiming to become a one-stop shop for decentralized financial services akin to a crypto bank built on top of a decentralized exchange.

As CTO, veteran software engineer Brian Yennie is in charge of IDEX development.

With under 30 employees, the exchange is based in Panama, according to Linkedln. Gnosis, G1 Ventures, Collider, and Borderless Capital funded IDEX with $2.5M as of August 2020.

Series Disclaimer:

This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.

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