Gnosis is another DeFi-based decentralized exchange (DEX) focusing on low liquidity markets through the so-called ‘ring trading’.
Cryptocurrency trading has evolved from simple crypto exchange-based market orders to complex limit orders initiated by third-party platforms. In other cases, experienced traders on a trading platform may be able to help novice traders by drawing strategies for them as it lets them earn a commission from their profits.
Apart from exchange-locked trading strategies, blockchain-based platforms enable the creation of complex processes that can be applied either to exchanges or facilitate trading low-liquidity tokens. For instance, the prediction market tokens have suffered from low liquidity before the US election was in our midst.
The Gnosis protocol can actually blast a fresh liquidity wave to these markets by employing ring trading on Ethereum-based virtual currencies and stablecoins.
How? Let’s dive right in.
The Gnosis protocol is supported by a limited company registered in Gibraltar. The platform’s funding comes from the Gnosis Ecosystem Fund (GECO). Apart from financing core developments, GECO also funds projects building on the platforms.
Currently, it’s offering grants amounting to $100,000. More than just funding, GECO provides mentorship to selected project teams. Top teams are provided with an option to work from the network’s offices in Berlin and the opportunity to showcase their creations at DappCon.
What is Gnosis?
Gnosis is another DeFi-based decentralized exchange (DEX) focusing on low liquidity markets through ring trading. Notably, the protocol is permissionless, allowing unrestricted access by everyone with digital assets to exchange and internet.
Note that ring trading is a type of trading that’s not restricted to individual trading pairs. Instead, it draws liquidity from other orders on the platform.
For example, let’s assume John wants to exchange DAI for Gnosis’s native token (OWL). And let’s say that Jackie, another trader on the network, wants to convert his OWL tokens to USDC. Furthermore, Charles wants to trade his USDC for DAI.
In a typical exchange setting, these traders may have to make multiple trades to get to their desired coins.
Interestingly, Gnosis makes the three traders’ lives a lot easier by joining them in a “ring.” Here’s how the magic happens: John sends DAI to Charles, Charles sends USDC to Jackie, and Jackie sends OWL to John; and the tradie is complete.
Why You Should Use Gnosis
The protocol presents various benefits to its users. Among them include:
- No gas cost – Gnosis incorporates the fees payable in every limit order. With the fees payable in the network’s native token, there are no gas fees for interacting with the Ethereum blockchain.
- Fair order settlement – Order matching and settlement is a decentralized and competitive process with the trader being the king. Therefore, settlement solutions provided have to consider the trader’s welfare.
- Implements ring trading – This ensures that users can trade any coin on the platform without worrying whether the token has enough liquidity.
- Employs batch auctions – Here, every order in the batch is cleared at the same price. Consequently, there’s a uniform and fair order clearing. A batch goes through three phases; collecting orders, accepting solutions from solvers, and final settlement.
- Fully decentralized – Gnosis is a fully decentralized platform. As such, it’s open for use by everyone. Apart from distributing trading and access, the protocol also decentralizes token listing. Its users have the power to list tokens if what they want to trade is not on the list of supported tokens.
How Ring Trading Works on Gnosis
Although the cycle looks like a complex process to perform on a blockchain-based platform, it’s actually made simple for traders.
- The protocol’s users place an order indicating their willingness to sell their virtual wealth.
- The network waits for five minutes and batches these orders together for a batch auction. For easier tracking, batches are assigned batch IDs.
The IDs are used to, among other things, check the validity of orders and to connect orders with batches since orders settled on the same cluster are assigned the same batch ID. Also, the IDs are linked to deposits and withdrawals.
- Note that the auction considers all open orders at the time of batch activation.
- Auctions are conducted by solvers who provide order settlement solutions. (More on solvers in the next section) solvers are chosen based on their capacity to provide a uniform clearing price for all orders in the same batch. Also, the Gnosis platform considers the benefits the order settlement solutions bring to the traders.
- Matched orders are settled on-chain and considered complete.
- It’s time for the next batch auction.
The protocol utilizes these so-called ‘solvers’ to settle orders.
Solvers are decentralized and chosen during every batch auction. Their decentralized nature opens the window for anyone on the platform to become a solver. However, the computational requirements and the technical knowledge involved necessitates solvers to be dedicated entities after economic incentives.
Gnosis conducts solver selection during the first four minutes of the five-minute batch auction. Note that solvers match both simple and complex orders.
A complex order is defined by, for instance, how many tokens are involved. And the ring’s width is determined by the number of traders involved. Note that the wider the ring, the higher the computational intensity.
To fill the orders within the shortest time possible, solvers can handle a maximum of 30 orders in one batch. After a batch auction is complete, the network enables users to withdraw their assets whether or not their orders were filled.
Unfilled orders mostly result from low order amounts. After all, these low order amounts consequently make it uneconomical for solvers to include them in their batches.
To reward them for their work, Gnosis takes 0.05 percent of fees from the trading volume as solver incentives. Therefore, they will tend to consider the orders that have higher fee allocations.
Interestingly, orders with low fees may ride on orders with high costs and get processed. For example, if a solver has outlined his total fee as 2 OWL tokens while a single order has a fee of 5 OWL, he can include small orders in the settlement solution since the cost is already paid.
Two Critical Components of the Gnosis Protocol
The Gnosis network is controlled by two major smart contracts; Epoch Token Locker and Batch Exchange.
Epoch Token Locker
This handles tasks associated with deposits, withdrawals, and token balances. Don’t be confused; the system uses epochs and batches interchangeably. The main actors on this smart contract are traders and solvers.
The Epoch Token Locker functions by reading and updating valid token balances for both the current and next batch.
The Exchange Engine smart contract allows the protocol’s users to place and cancel orders. Also, it samples and selects the best order settlement solution from solvers. The main players here are traders, solvers, and token-listers.
The smart contract handles token listing, order management, fee mechanism, and order settlement solutions from solvers.
Gnosis solves the problem of low liquidity in many markets. For example, in the stablecoin market, the US dollar has been tokenized countless times. As such, liquidity is shared across many USD-pegged coins, making it hard to exchange one token for another.
However, Gnosis combines individual token order books to create global liquidity, easing trades between low liquidity stablecoins. Furthermore, its open-source nature and externally-audited smart contracts make it secure and usable by all.
The protocol’s implementation of ring trading eliminates a trader’s need to place multiple trades in search of their preferred token. In addition, it saves time and fees incurred by traders since order settlement is handled in batches/epochs.