The IDEX exchange is best known for being the most used decentralized* application on the Ethereum network, as well as having more trade volumethan all of the other Ethereum decentralized exchanges (DEXes) combined (as of July 16, 2019). CoinMarketCap reported a 30-day volume of nearly $80M USD.
*However, IDEX is not entirely decentralized, at least not yet. It’s more of a hybrid. Custody of funds and authorization for trades is controlled by the user via smart contract, whereas trade execution is currently managed by IDEX’s centralized application stack.
This means that the trader has the user experience of a centralized exchange — users can place and cancel orders in realtime at no cost — while having the security of a decentralized exchange. This also means that New York state users have been IP-blocked, and beginning on August 23, 2019, US-based users will have limitations on which assets they trade, and all users will be required to comply with know-your-customer (KYC) processes.
However, full decentralization is on the roadmap for IDEX stakers, and I wonder if that could alleviate the KYC requirements. Three staking tiers will replace the current centralized component to enable IDEX to become a fully decentralized exchange, while maintaining its prized user-experience. Rather than having validators execute all trading functionality, IDEX is unbundling the components, and each will be handled by validators on three different tiers with corresponding incentive mechanisms.
There is currently one way to participate in staking: hosting IDEX’s trade history for its users to view and analyze previous trades executed by IDEX. That’s referred to as ‘Tier 3’ of IDEX’s staking tiers. Tier 2 validators, transaction arbiters, will be responsible for matching and validating trades before sequencing and submitting them to the Ethereum blockchain to be mined. Tier 2 is anticipated for Q4 2019.
Finally, Tier 1 validators will be responsible for the orderbook and trade engine: while adhering to rules around price/time priority, existing orders (and off-chain balances) will be served to users so that they can match against trades. There is no estimate for the release of Tier 1, and you can read more about the tiers here.
IDEX currently uses the Ethereum network and only lists ERC-20 pairs, though there has been mention of expanding beyond Ethereum. Compared with Binance Chain, which is a standalone Cosmos-SDK chain: IDEX splits the (currently off-chain) functionality into three tiers, whereas Binance Chain will consist of ‘accelerated’ and ‘witness’ nodes.
Staking participants must run an Ethereum full node and Parity client. Participants have noted that it can be challenging to keep the node synced. Here is the documentation.
IDEX is the new token name that replaced the AURORA token. The only thing that has changed about the token is the name. According to StakingRewards, there are 1B IDEX tokens in total, and ~41% of IDEX tokens are currently participating in staking.
20% of the total 1B IDEX tokens (200 million) has been dedicated to a program that rewards market makers. One percent of the remaining rewards tokens are distributed each month, proportional to the USD value of filled limit orders at the time of execution. So market makers were rewarded 2M during the first month, 1.98M the second month, 1.9602M the third month, etc. This is important because it seems that the team wants to enable major traders who have earned IDEX tokens over time to stake and control the order book (thanks to Yannick for pointing this out!).
From my searches, IDEX is only being traded on the IDEX exchange itself, with an average of about $30k of daily volume.
The IDEX token is used for Tier 3 staking, and in future it will be used for Tier 2 and Tier 1 staking, so its value is primarily to capture trading fee revenue from participation in the IDEX network. There is also the possibility that the token will be used for governing the IDEX platform, which would give the token decision-making value.
There is a staking minimum of 10,000 IDEX tokens, and there is no maximum. The IDEX tokens don’t need to be bonded or sent to a pool. They must be in the wallet for at least seven days, and the staker must a) run the Tier 3 IDEX node and b) sign the node using the wallet that contains at least 10,000 IDEX tokens.
A staking period lasts 14 days, starting Mondays at 0:00 UTC and ending Sunday 23:59:59 UTC. The staking period may reportedly change during the alpha period, though the team has indicated that they will provide ample notice. Stake Capital reported that there were 149 external nodes participating in IDEX staking at the time of the AMA.
Rewards are dynamic and relative to the trade volume of IDEX. When the market is volatile, the fee pool increases, and stakers see bigger payouts.
IDEX collects 0.2% in trading fees from the market taker and 0.1% from the market maker, and stakers currently earn 25% of all ETH earned by IDEX (thanks to u/NoClaim1 for the correction!). The trading fees collected by IDEX are converted into ETH each staking period. At the end of a staking period, fees are distributed to stakers based on the percentage of the total credits they earned within a period.
Eg. a staker with 1% of credits for a staking period earns 1% of the payment for that period.
Five minutes of uninterrupted uptime adds to the weighted amount (credit) for each staking period. Every 10,000 IDEX staked per 5 minutes earns 1 credit. Fractional credits can be earned (eg. 11.5k IDEX earns 1.15 credits).
Eg. 10k IDEX staked for half staking period earns ~2,000 credits
Math: (14 day period/2 * 24 hours * 60 minutes * 1 credit) / 5 minutes = 2k credits
Staking rewards (ETH) are disbursed automatically (in-protocol) by IDEX every 14 days. At the time of our AMA, Staking Rewards reported ~12% annual rewards for IDEX, whereas in our AMA, Stake Capital reported earning ~10.5% in annual rewards. On July 16, 2019, Staking Rewards is currently reporting just over 20%.
The minimum redeemable amount for a staking period is $3 USD equivalent in ETH. If a staker’s balance is below this amount, it will roll over in to the next staking period. Fee token amounts with at least $50 in value that can be sold on IDEX will be liquidated into ETH within 12 hours of the end of a payment period. All other tokens carry over to the next period. At the end of the period, fees (in ETH) are automatically distributed to users’ staking wallets within 48 hours. Gas fees for sending payments are taken out of the total payment for that period.
Once active, Tier 2 staking will earn 33% of trading fees and Tier 1 staking will earn 42%. We do not know if staking rewards can be tracked for tax reporting.
The only current risk is that of opportunity cost: if you’re offline, you don’t capture rewards from trading fees. There do not appear to be any way in which a staking node can have its operations disrupted by the protocol for breaking protocol rules.
The IDEX roadmap reportedly does not include plans for delegation*, so anyone that participates in staking must also run a node.
*However, Stake Capital tells us that they’re working on a smart contract based, trust-minimized custodian pool..
IDEX is still in an early phase of development, so changes to the software/network appear to be determined by the core team. The governance of the network will reportedly be given entirely to those staking it, allowing all participants to propose and vote on changes.
With the upcoming KYC procedures being implemented and NY state residents being blocked from trading, there appears to be some uncertainty about IDEX’s ability to serve its current users. Tier 2 and Tier 1 decentralization could remove any control from the IDEX team, and I wonder if full decentralization could ease the need for invasive KYC processes and mitigate legal threats from the SEC and other organizations.
Trading fees are divided pro-rata between stakers, more IDEX staked amongst the pool of stakers means a smaller slice of the ETH pie for the individual staker. But stakers on IDEX are betting entirely upon high IDEX trade volumes to earn high fee volumes, so IDEX will likely need to 1) continue to dominate the Ethereum exchange market in the face of contenders like Kyber Network’s Kyber Swap and 2) enter into non-Ethereum markets to compete with Binance Chain.
My understanding is that in the short-term, ERC-20 price volatility helps to increase trade volume. In the long-term, however, I think that IDEX must attract traders away from centralized exchanges by 1) attracting more ERC-20 liquidity and 2) providing non-ERC-20 token liquidity, and I can’t see how Tier 2 and Tier 1 will accomplish that.
IDEX CEO Alex Wearn reported that large crypto funds want to trade on IDEX, but cannot, due to the lack of KYC. He believes that KYC procedures will allow large funds to participate and create more liquid markets.
There are many moving parts in the equation, and so here is the list of challenges for a staker to assess. The asset being staked (IDEX) is different from the asset being earned (ETH), and the price of both assets is volatile. The volume of trading fee rewards is also volatile, since trade volumes are volatile. Stakers appear to be at the mercy of the IDEX team, in terms of software and governance decisions, and it’s hard to predict what the effect of enforcing KYC procedures will be on the trading volume. Finally, the dominance of ERC-20 tokens may also be uncertain.
With all of these uncertainties and no risk of slashing, I suspect that at this time IDEX staking may be well-suited for the most adventurous among us. If you think I’ve missed something, let me know. You might as well join us over in the Staking Hub Telegram channel (since you’ve read this far!).
You can read more about IDEX staking here.