Xena Exchange has announced the beginning of beta testing for its decentralized accounts, or dAccs. The dAccs are being developed to reduce clients’ exchange or counterparty risk by up to 90% through customer fund segregation. That means Xena Exchange clients will be able to trade contracts on a centralized exchange with inherent liquidity while storing their funds in multisig non-exchange wallets.
By now, clients of centralized cryptocurrency exchanges have lost over 1.9 billion dollars in aggregate as a result of fraud and hacker attacks. Counterparty risk is one of the main risks to consider when trading cryptocurrency. In contrast to traditional financial markets, where different institutions, such as exchanges, brokers, clearing houses, and banks, provide infrastructure to minimize such risks, in the cryptocurrency market, exchanges are usually a combination of all these institutions in one entity. Thus, trading cryptocurrency requires depositing funds to an account opened at an exchange, which, in most cases, is not regulated by any agency. Within the exchange, the funds are tracked off the blockchain, so in general, clients have little control over their funds.
“The potential of the cryptocurrency market is huge. But the risks it bears practically override the prospects. The leading exchanges in the cryptocurrency industry give no guarantees and seem to be unwilling to change anything in the game. Once this situation changes, we will consider this new market closely.”
CEO Gemcorp —
investment management firm
with $1.2 bln in assets in management
DAccs are specially configured Lightning Network nodes connected to the Xena Exchange infrastructure. To use dAccs, clients need to initiate a channel (multisig wallet) and deposit funds to it. Within the channel, clients can send money to their exchange account in less than a second or withdraw funds from the channel, thereby closing it. The exchange has no access to the funds stored in the channel and can close the channel only if the payment sum within it exceeds a certain level or if the amount of funds stored in the channel is very low.
In the case of a margin call, the exchange sends a notification to the client, who can deposit extra collateral to their exchange account from the channel.
The advantage of using dAccs is holding less collateral on the exchange and thus reducing credit risk. The increased leverage and market risks are compensated by the opportunity to immediately send extra collateral to the channel. The contracts’ mark-to-market feature on the exchange provides a minimum of 30 seconds to transfer collateral between the channels.
“This innovation is likely to turn the tides on the cryptocurrency market, where market participants are torn between centralization and decentralization. This will increase the trust of institutional investors and possibly boost trading volumes. Security is above all else.”
CEO Xena Exchange
On October 16, 2019, Alexei Semichastnov presented the functionality of dAccs at the Lightning conference in Berlin. Now, the accounts are undergoing beta testing, and developers and traders can take part in the testing by applying to email@example.com. After the release, those who participated in the beta testing will be able to use dAccs for free for six months.