Today, FTX CEO Sam Bankman-Fried announced the future launch of Serum Project, a decentralized crypto exchange with derivatives, built on the Solana blockchain. The exchange will support cross-chain swaps, thousands of transactions per second and will enable creation of all types of Defi primitives that can be transferred to Ethereum or other blockchains.
In recent weeks, gas costs on the Ethereum network have skyrocketed from just a few gwei, to over a 100, making small value, complex transactions prohibitively expensive. Just yesterday I tried to take some wBTC out of Curve.finance, but the gas costs meant my transaction would be over $20; suffice to say it's still sitting there. Gas prices are probably never going to come down before we get to ETH 2.0. But this is a good thing! It means the network is gaining adoption and traction amongst different users, funds, and applications. Billions of dollars of value is being locked in Defi, seeking yield and farming governance tokens.
Trading on Defi isn't the best. It requires Uniswap, which is an Automated Market Maker. AMM's are weighing machines. They take two assets added as liquidity, drop them on the scale and find a price. The whole process is decentralized, requires no price oracles and is completely trustless. AMM's are brute simple and that's probably one of the reasons Uniswap has been able to grow so fast. Anyone can create a contract and start adding liquidity.
Professional traders don't like AMM's for the simple reasons above. Effective trading is a lot harder without order books, limit orders, or bids and offers. Even providing liqudity requires equal amounts of each asset to be supplied and price changes create impairment losses.
One of the big issues now is that AMM's are complex smart contracts that require gas intensive transactions. A single Uniswap trade needs over $10 in gas, meaning that large traders are completely pushing out smaller traders from entering the market.
So with the announcement today by FTX's Bankman-Fried, he's really striking a to the heart of a problem many different projects are trying to solve. If growth of gas usage is assumed to continue as Ethereum gains more adoption, then the best options for a decentralized, professional trading platform will be either to operate as a layer 2 solution or on a separate blockchain. Serum chooses the latter and is slated to run on Solana.
Solana is lightning fast. Solana can process 10,000 times as much as Ethereum; and it's 1,000,000 times cheaper. Built on Rust, the protocol has, as Sam says, "performance that looks kind of like what you’d expect from a centralized product on AWS." It's a great candidate blockchain to try and rollout a decentralized exchange.
Solana is also untested. It's newly launched and its security has yet to be put to the test. With a market cap of only 40 million, it does not have the robust security that a zksnarks enables L2 chain would have. Serum must be betting on significant price/security increases in the near future. Since it's so new, the claims made by Sam are untested, but if true, it would have a substantial impact.
"Enter Project Serum"
The scale of Serum is immense as its trying to wrap up the entire defi ecosystem into a single project. In the initial whitepaper it was announced that Serum will support:
- SRM Token
- Trustless cross-chain swaps
- A full limit order book
- Ethereum and Solana integration with interoperable ERC-20 tokens
- Physically settled cross-chain contracts
- Serum BTC: a trustless BTC token (ala wBTC, RenBTC, tBTC)
- SerumUSD: a decentralized stable coin based on rolling dollar futures.
The token powering the exchange is SRM, a utility token that reduces fees by 50%. All net collected fees will be burned. Total supply of the token will be 10 billion SRM, to be released over a period of 7 years.
SRM is enabled for staking, requiring 10 million SRM and also 1 MegaSerum (MSRM) a wrapped token of 1 million SRM. In total a node operator will have to stake 11 million SRM to create a node. Both SRM and MSRM will be freely tradable.
One of the more interesting things about MSRM is that only 1,000 can be minted at anyone time. This means that only 10% of the total supply of SRM can ever be locked up to mint MSRM. All of the availible MSRM will be sold in a private sale and private auction before the launch of the platform. All MSRM will be locked for at least one to seven years. That has to be one of the longest token releases for any project.
The hardest problem for any side chain is how to trustlessly deposit assets. Atomic swaps will be an option in the future, but they are far off right now and early project rollouts have low liquidity. Cross-chain swaps are notoriously difficult and is a nut that has yet to be fully cracked.
Serum is attacking cross-chain swaps differently than other projects. Most current implementations use trusted arbiters and smart contracts to custody assets during transfer. But this requires trust of the smart contract and or the arbitrators that hold the wallet keys and or adjudicate punishment.
Serum takes an interesting twist, requiring no arbitrators at all. Instead of relying on third parties, users will send their assets plus extra collateral to a smart contract. In case of dispute, the smart contract decides in favor of either sender and the collateral insurance is paid out to the winning party.
While not a trustless bridge, it has aspects of it. Earlier implementations like xDAI and REN are still somewhat centralized, leading the question to how Serum will overcome this issue.
The SRM token is used in the collateral system as collateral insurance. If the network fails or is exploited, the node operators will be called upon to provide emergency capital. It does make sense to have all parties with skin in the game. Without, the node operators would be able to flee the network if they believed a forced haircut to holdings was incoming.
It's a novel system, but I'd like to see it in action first.
The pressing question is how much extra collateral do you have to put up? It would have to be substantial enough to force a user to abstain from stealing funds, but at the same time be small enough to encourage high volume. I think long term this would be a point of debate amongst node operators.
SerumBTC & SerumUSD
The most novel aspect of Serum is how they plan to implement decentralized stablecoins and wrapped tokens. Current methods require custody by a regulated agent (wBTC, USDC) or a series of arbitrators (REN, DAI). But there is always some value locked up somewhere.
But this really isn't necessary with derivatives. In this case, Serum's synthetics are created from rolling weekly futures contracts. At or near expiration, value is rolled into the next week. These sets of contracts are all wrapped into one token which is perpetual and can be issued cross-chain as an ERC-20 token.
You end up with a nifty token which is based on a derivatives contract, fully functional and usable in the same way as DAI or USDC. It's a great idea and I think it could be one of the main volume drivers for Serum. Demand for stablecoins is insane right now as yield farmers have flooded the market to collect that sweet governance token premium.
The token isn't without its disadvantages. One of the first things that popped into my head was the fact that all futures contracts on cash typically are in contango. When you go to roll from one weekly to the next, you pay a bit of premium. So when you wrap these contracts into a token, it should trade at a discount to spot dollars, as it has a negative rate. I asked Sam about this and he thought it could be mitigated through the use of a savings vehicle like the Dai Savings Rate that compound has.
Sam and FTX have hit it out of the park with Serum if they can achieve what's laid out in the whitepaper. L2/Sidechain transactions are going to explode soon and this could be the very first project to get serious adoption. Or it could just be another decentralized exchange that gets a lot of attention in its first few months and never gains meaningful volume/adoption/liquidity. I really doubt this however, as FTX is one of the top market makers in the world and has access to untold amounts of liquidity they could port into Serum.
Serum should have deep books and attractive enough volume to drive adoption from day 1. More importantly, Serum is slated to go online in just a few weeks. By the start of Q4 the exchange will be fully functional and worth judging. Right now, the hype seems to be real and the private sale is finishing in a flurry of MSRM and SRM sold.
Don't sleep on Serum. It could be the first of many major projects built on Solana and the first truly decentralized, high throughput crypto exchange in the world.