The Crypto Protocol Trying to Unite Every Exchange Order Book

Imagine the liquidity of every crypto exchange, but in one giant pool. That's what Paradigm aims to build, and investors are on board.

AccessTimeIconOct 16, 2018 at 11:59 a.m. UTC
Updated Sep 13, 2021 at 8:29 a.m. UTC
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Imagine the liquidity of every crypto exchange, but in one giant pool – one all-seeing order book that listed every conceivable bid and ask for any asset.

That's the promise of a new startup announcing its equity seed round Tuesday exclusively with CoinDesk. Led by Polychain Capital, with participation by Dragonfly Capital Partners and Chapter One, the Paradigm Foundation has raised $1 million to build a decentralized order book open to anyone that wants to trade crypto.

It's all part of a plan Paradigm's CEO, Liam Kovatch, calls the company's mission "to create open, borderless, and efficient global markets."

Co-founded with Henry Harder at Columbia, the two co-founders are on leave from the university while they build out the product, which should have a beta to show by the end of the year.

The small round was oversubscribed, the founders say. "The decision to cap at $1 million was strategic. At a high level, 0x raised $775,000 for their seed and we wanted to follow a similar route in regards to being capital efficient and lean," Kovatch told CoinDesk.

Decentralized exchanges have been slowly taking root in the market, but they don't have nearly the liquidity centralized exchanges do. That is, when someone wants to make a sell order, it's very likely there won't be anyone to buy. They lack what's called "order book depth."

"To this day, individual financial relayers (like ones building on the 0x or Dharma protocols) have had to not only bootstrap a completely new set of users, but also their own liquidity," Niraj Pant from Polychain said in a statement.

For traders, one order book that shows every possible counterparty on earth is an enticing proposition. It's the difference between the pre-internet world of travel agents and the present world of finding airplane tickets through, say, Kayak, which plugs into everyone's deals.

Though as Kovatch pointed out, Paradigm takes it slightly further than a Web 2.0 site like Kayak can, because it's built on the decentralized web. Rather than curating all the offers, Paradigm actually has them all listed on one platform.

He told CoinDesk:

"Paradigm simply provides the 'location' for vendors to find customers and customers to find vendors."

A competitive pool

In a sense, then, Paradigm is a bet that the walls between the big crypto exchanges will inevitably fall.

That's the view of Dragonfly Capital, which recently announced its first $100 million crypto fund, with backing from venture leaders, including Chris Dixon (a16z), Olaf Carlson-Wee (Polychain) and Salil Deshpande (Bain Capital Ventures).

Dragonfly specifically aims to capitalize on crypto's growth in Asia, and it firmly believes that Paradigm is building necessary tooling ahead of trends already underway there.

"What is remarkable about crypto and crypto companies is how willing they are to disrupt themselves," Alex Pack, Dragonfly's managing director, told CoinDesk.

Dragonfly already has relationships with large exchanges. "Many of them are working on internal DEXs [decentralized exchanges]. They are doing radical experiments with their core business all the time," he said.

It's just a matter of time before they start to open up to join a platform like Paradigm. "There is plenty of room for centralized entities in a paradigm world," Pack said, rattling off examples like order matching, market making, automated trading engines and more.

"Binance has said that they want to become completely decentralized," Kovatch noted. Still, he's cautious about predicting the evolution will happen quickly. "The liquidity network that we're creating needs to be large enough to incentivize that movement," he granted.

But Paradigm has the advantage of not needing to build all that out themselves. As new companies build up on platforms like 0x, they have a reason to plug into Paradigm. And users don't have to be companies.

"We allow anybody – you don't have to be a reputable exchange – to advertise liquidity," Kovatch said. It will take some coding to do it, but regular people can put their offers on the same book as the giants.

Not everyone will want to do that, so companies will be able to compete on user experience and features.

What they won't be able to compete on is fees. Trading fees should evaporate in short order once the shift starts, Kovatch predicts, saying: "I don't think multi-dollar trading fees are going to really exist."

A different paradigm

For now, though, decentralized exchanges run too slow.

Trustlessness has tradeoffs. Users trust regular exchanges so settlement can be really fast. All the "ownership" is virtual anyway. No one has the private key to their accounts on centralized exchanges. They just have balances on a spreadsheet.

This allows centralized exchanges to nail down transactions much faster than decentralized ones can, which need to wait for block confirmation times.

"When you go on something like Radar Relay, you'll be able to watch order book changes," Kovatch explained to CoinDesk. "It's ridiculous to think you can mark movements with a pen."

On Binance, the order book is changing thousands of times a second, he said. It's just on another level of liquidity.

To catch up, Paradigm is working on solving that speed problem. Their protocol can be thought of as a sidechain, one that's lightweight and buily specifically for its use case. "It is completely independent of ethereum," Kovatch said.

Making Paradigm "competitively performant" is, he said, "something we're still working on to this day and we will be working on for a considerable period of time."

Kovatch concluded:

"The decentralized finance community is one of the strongest use cases – if not the killer app – for ethereum."

Loom image via Shutterstock


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