The Gnosis Dutch Exchange #3
Having introduced the Gnosis Dutch Exchange (DutchX) and explained its mechanism design, we’d like to provide you with more details about the exchange in a series of bi-weekly posts. We hope this series will shed light on the exchange’s features and leave you not only well prepared for the DutchX launch (planned for start of Q2), but also ready to participate.
This week, we’d like to run through all things tokens.
Trading Tokens on the Gnosis DutchX
The written smart contract for the Gnosis DutchX is compatible with any ERC20 token. When we talk about a particular auction, we mean any token-pairing, i.e. Token A is being “sold” (auctioned off; sellToken) and Token B is the token used to buy Token A (buyToken). Auctions for any token-pairing run independently from one another.
Fiat currencies as well as crypto-currencies that aren’t ERC20 compatible (i.e. ETH) will not be tradable on the DutchX. Hence, users need to hold WETH (“wrapped ETH”) to be able to trade ETH for other ERC20 tokens.
Anyone is able to list ERC20-compatible tokens following a standardized process, as explained in detail below.
Let’s assume you’d like to trade the Y Token which is not yet listed on the DutchX. If you’d like to introduce the Y Token to the exchange, you will first have to list the WETH/Y Token pairing. To do so, WETH will be the token auctioned off (sellToken) and the Y Token will be the token bought (buyToken).
For the WETH/Y Token pairing to be listed, you will have to fund the auction with at least $10,000 worth of ETH as sellTokens. You will also have to set a price for the WETH/Y Token pairing as we will start the auction at twice that chosen price. The auction will start 6 hours after the conditions for the token listing are met.
When setting the price, you’re incentivized to choose the real market price. If you quote a higher price than the market price, you increase the running time of the auction — other than that, this strategy won’t have an impact. If you quote a lower price than half the market price, the auction will start running at below market value and hence also clear below value, resulting in you selling your initial ETH funding at a loss. If the price you quoted is marginally too low, you simply decrease the running time of the auction.
Initiating any particular Token-Pairing
After the new Y Token has been listed using WETH, every specific Y Token-pairing to be traded will have to be initiated separately. To ensure that there is sufficient trading volume, this initial listing will have to be funded with the equivalent of at least $10,000 worth of ETH. For example, if you’d like to trade the Y/A token-pairing, and A as well as Y are already listed on the DutchX, you will have to initiate this particular Y/A token-pairing by funding the auctions Y/A or A/Y with at least $10,000 worth of sellVolume combined. You will not have to set a price — we calculate the price based on the A/ETH and Y/ETH rates on the DutchX.
The auction will start 6 hours after the conditions for this particular token-pairing initiation are met.
With both listing or initiation of tokens, the opposite auction is automatically available, too.
Once ready, we will likely launch the DutchX by listing just one or two typical tokens (each as a pairing with WETH) at the beginning. We will be using the above mentioned mechanism to do so. We will select the tokens based on the project and a significant token trading volume. Of course, token pairings may then be listed by anyone following the aforementioned process.
Once token-pairings are listed or initiated, the consecutive auctions only start if sellers deposited at least an equivalent to $1,000 worth of tokens in the auction (as described in the Mechanism Design of the DutchX).
No particular token is needed for users to participate in the DutchX!
GNO and OWL
You do not need to own GNO or OWL to participate as a seller or buyer in the Gnosis DutchX. However, OWL tokens may be used to pay up to half of the platform fees. One OWL can be used to pay for the equivalent of one USD in fees. OWL used to pay for fees are not credited to Gnosis or any other market participants but are instead consumed (“burned”). Check out the details of our GNO/OWL token mechanism here.
Tulip tokens are intrinsic to the DutchX: Tulips are automatically credited to platform users (buyers and sellers): One Tulip is generated for trading one ETH worth of any whitelisted token — calculated at the time the auction closes with the last available ETH price on the DutchX.
Tulips are solely used to lower the participant’s platform fees. They are inflationary as their creation is based on the volume traded on the DutchX — there is no mechanism in place to reduce their volume.
All tokens that are not purposefully created to simulate trading will be whitelisted. The whitelist provision is put in place to prevent any potential gaming of the mechanism for obtaining more Tulips and hence reducing trading fees.
Tulips are credited to the user by the time funds are claimed, and are locked by default. Only locked Tulips qualify for fee reduction. You may unlock Tulips at any point in time (once unlocked they cannot be used for fee reduction) — after 24 hours have passed, you may trade them freely. They can be re-locked at any point in time.
Similarly to GNO and OWL, you do not need to own Tulips to participate as a seller or buyer in the exchange.
That just about wraps up all things tokens in the Gnosis DutchX. Next up: The Fee Mechanism and how Tulips lower your fees!