September 2020

Project Serum

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FTX, one of the world leading cryptocurrency derivatives exchanges, has launched a decentralized exchange called Serum that runs on Solana. Serum is a decentralized exchange for spot and derivative trading and has been met by excitement in the industry as FTX is one of the most prominent and well-respected exchanges in the digital asset space.

FTX, one of the world leading cryptocurrency derivatives exchanges, has launched a decentralized exchange called Serum that runs on Solana. Serum is a decentralized exchange for spot and derivative trading and has been met by excitement in the industry as FTX is one of the most prominent and well-respected exchanges in the digital asset space. The new Serum DEX boasts sub-second trade confirmations and fees as low as USD0.00001 per trade, making it superior to both other DEXs and most centralized exchanges. This month we are going to dive into what Project Serum is, what makes it superior to competitors and the disruptive impact that it may have.

Exchanges are a core piece of infrastructure for the crypto space, allowing users to buy and sell tokens. Most trading today happens on centralized exchanges. On these centralized platforms users deposit their assets into an exchange wallet and then effectively trade IOUs of the underlying assets. While trades are taking place, no assets are actually moving over a blockchain. Instead, users are trading “paper” assets with each other. On withdrawing funds, the IOUs of the underlying assets are converted back into digital assets by the exchange and sent to the user’s wallet. The benefit of this centralized system is that it can run at low latency as no assets are actually moving between digital wallets.

Centralized crypto exchanges suffer from one key flaw: unlike on traditional securities exchanges, crypto exchanges actually custody the digital assets being traded. For example, one of the Binance Ethereum wallets can be seen to be holding over USD200m of cryptocurrency. Single large wallets like this present a risk for users and an opportunity for hackers. This custody issue is solved by decentralized exchanges (DEXs) as they do not require third party-custodians. Instead trades occur peer-to-peer through the use of smart contracts, with assets settling directly on-chain. As a result of this, traders keep custody of their assets throughout the trading process. DEXs are becoming increasingly popular and are starting to threaten the dominance of centralized exchanges. Almost USD12bn was traded on DEXs in August 2020, with DEXs now accounting for over 5% of centralized exchange volumes.

DEX volumes are on the rise and it seems that centralized crypto exchanges are at risk of being disrupted. In this context, it is interesting that FTX, one of the largest crypto exchanges in the world (handling over USD1bn of derivative trades and over USD100m of spot trades every 24 hours), is releasing its own DEX that risks cannibalising FTX’s primary business. This DEX, called Serum, is one of the most sophisticated decentralised exchanges ever released.

Serum has a range of benefits over existing DEXs that could catapult it into one of the leading decentralised exchanges with significant volumes:

  • Speed: most prominent DEXs are running on Ethereum, which has a block time of between 10 and 20 seconds. This means that after a trade has been submitted, a user needs to wait this period of time to check if the trade has been confirmed. Serum is running on Solana which has a block time of 400 milliseconds. This makes trading on Serum lightning fast, and on par with centralized exchanges.
  • Cost: Ethereum gas prices have become very expensive recently, with users paying up to USD100 to process trades on DEXs. Serum transactions cost as little as USD0.00001 per trade.
  • Decentralization: Most DEXs offering derivatives rely on a centralized oracle (data provider) that provides a liquidation price. Serum will use only decentralized oracles to function.
  • Cross-chain support: Most of the major DEXs only offer trading pairs between ERC-20 tokens on Ethereum. Serum has cross-chain support meaning that assets like Bitcoin can be traded against other tokens from different base layer protocols. In particular, there is full integration between Solana and Ethereum tokens.
  • On-chain order book: The leading DEX on Ethereum today is Uniswap, which uses Automated Market Making (AMM). This is where there is no order book and instead mathematical formulas set the price of a token. While AMMs are hugely innovative, they cannot handle limit orders, bids or offers. Serum has an on-chain order book allowing users to decide the price, size, and direction they want to trade. This gives traders more control.

In addition to the above benefits, one of the more interesting technical innovations that Serum brings to the market is a stablecoin backed by an assortment of other stablecoins. SerumUSD has been proposed by the team, which would take a basket of specified stablecoins such as USDT, USDC, PAX, USDT, DAI, mUSD and sUSD. Using a series of derivatives markets the token would settle to the median of the 7 tokens in the basket. This means that if any one of the stablecoins fails, then the price of SerumUSD will not fall at all as the majority of the coins are still worth USD1 and the token price represents the median and not the average of the basket underlying it. In theory, this means that SerumUSD should remain more tightly tied to the price of USD than any one of the stablecoins that underpin it.

Serum is a fully decentralized project that does not have shareholders or a corporate structure. The Serum DEX has a token attached to it, SRM, that acts in a similar way to Binance’s BNB token. Holding SRM gives a user 50% off fees on Serum and all of the net fees on Serum go towards buying and burning SRM. As a result of these two mechanisms it is anticipated that there will be demand for SRM and upward price pressure. Demand will come from users of the platform looking to get a discount on trading fees. Upward price pressure can be expected in the long run as usage of the platform leads to a reduction in SRM supply, given that the fees earned will be used to buy SRM and burn the token (similar to a share buyback through a company).

Serum launched on 30th August and already has over 22 trading pairs. The SRM token is also live and today has a market cap of over USD100m. Since the launch, FTX (Serum’s creator) and its founder Sam Bankman-Fried have been featured heavily in the news. FTX purchased BlockFolio, a popular portfolio tracking app, for USD150m and Sam Bankman-Fried has taken control of a recently launched (and somewhat controversial) DeFi protocol called SushiSwap. Bankman-Fried has made it clear that he wishes to integrate SushiSwap with Serum. Whether or not the BlockFolio acquisition or the SushiSwap integration impact the long-term success of Serum remains to be seen. However, it is clear that the team surrounding the project is not afraid to make significant moves in the blockchain trading and DeFi space. At such a nascent time in crypto, this bravery may be rewarded.

CMCC Global is excited by the prospect of Serum and the project’s decision to build on Solana reinforces our view that Solana is the most advanced and credible layer 1 competitor to Ethereum. We foresee more high-profile projects choosing to build on Solana and look forward to supporting the growth of this ecosystem. CMCC Global has taken a position in Serum across its three digital asset funds and we continue to hold a significant Solana position that will vest later this year.