Abstract and Introduction:
Among decentralized exchanges, there are currently no fast, low cost, Bitcoin based exchanges with full order books(with bid and ask) that are actually truly safe and decentralized. In this paper we will highlight the reason and need for a decentralized multisignature exchange using threshold signatures and explore its features and services and how it compares to existing solutions. We will show how it is accomplished with signature hashes, 2 of 2 or 3 of 3 multisig with threshold keys on a decentralized backend. We will also explain the use of force majeure backup strategies using checklocktimeverify. Finally we will explain how users and hosting providers are incentivized to support this DEFI infrastructure while maintaining privacy measures and not prone to hacks. The conclusion will show how this system is a superior method for exchanging digital cash and more.
When it comes to exchanges there is a rampant problem of hacks, data breaches, inside jobs and exit scams due to centralization. The most known was in 2014 when the Mt.Gox exchange, which handled about 70% of the entire market volume, got “hacked”. As a result it crashed the Bitcoin price and about 7% of all the Bitcoins at that time were lost. It was clear that centralized exchanges can’t be a long term solution for the decentralized nature of Blockchain technologies and for the most part these exchanges can not be trusted under any circumstances. Up until today it is estimated that at least 20% of all Bitcoin in circulation are lost forever or have been stolen most often by centralized exchanges and exit scams or “hacks” by insiders. Besides, it was the fact that Bitcoin is ownerless and decentralized that let it thrive in the first place! So NightTrader should seek to mirror this success in the form of a decentralized exchange.
Current Solutions and Reason to Evolve:
Decentralized exchanges have emerged but other than the success of “automated market makers”the traditional bid and ask style exchange could not yet gain significant market share. This is mainly because they are slow, complicated to run or only work with so-called “middle coins” or other blockchain “ecosystems” which are not truly decentralized exchange solutions, but more a sort of bridge. Ethereum has had wild success with exchanges such as UniSwap however these exchanges although being wonderful have some downsides. One of them is that there is no ability to bid, there is impermanent loss for liquidity providers, users can suffer from “rug pulls”, they pay high gas fees for small trades and so forth. Although gas fees may reduce with zk-sync and rollups, there are still the other mentioned drawbacks. Some systems such as BitShares pioneered a sort of middle coin solution although this wasn’t actually truly decentralized because there was always risk where the coins were held. Then there are systems such as Blocknet or Komodo or various “atomic swap” solutions and wallets. These are the “perfect” solutions cryptographically. However practically they have not caught on because of the high costs of doing every single transaction on the blockchain. This can be a hindrance because it doesn’t offer the fast, high volume trades which are so popular with users. We wish that they would catch on, however demand and liquidity are important for users to reduce cost of trading with a better spread.
Nighttrader changes this paradigm by utilizing the built in signature hashes which were most likely intended for these types of applications since Bitcoins inception. To us it comes as a surprise that this solution was not used already. However perhaps it is because things such as “Shamir’s secret sharing” and threshold signatures had not risen to popularity yet, so signature hashes in a multisig alone would at best form a green address unless combined with other methods. Still, why Coinbase or Binance hasn’t implemented such a simple feature of giving a user 50% control over the account appears to be almost borderline negligence considering the volumes they get and money they make… whatever happened to putting the customer first?! What many don’t understand is that Bitcoin came with some built in contracting abilities. So NightTrader uses the combination of signature hashes, multisignature and threshold keys to achieve the most secure exchange possible.