As decentralized finance continues to grow in popularity, the need for better liquidity pools has become more evident. It is still the case that centralized exchanges hold a tight grip on cryptocurrency markets as their decentralized counterparts are yet to scale properly. An influence that in many cases has been exploited by bad actors.
The most topical example of the risks of dependending on centralized exchanges for liquidity comes by way of the recently hi-jacked LTX token launch. After a successful $3 million private investment round, Lattice Exchange had begun offering its native token on Uniswap. It opted for a decentralized approach to the launch that relied on the same automated market making (AMM) algorithms it promises to improve. However, due to current technical constraints in decentralized exchanges such as Uniswap, Lattice partners advised for an Initial Exchange Offering (IEO) on three mid-tier centralized exchanges. A move that would guarantee greater public participation in the already successful project.
Prior to the IEO, Lattice was asked to sign a “cumulative clause” specifying that if the LTX token went below a certain threshold Lattice would need to activate additional market making resources. In other words, Lattice would be obligated to provide further funds in the event of a massive sell off of LTX tokens.
The token launch was set for early in the morning of November 6th and LTX soon sold out on all three exchanges offering the asset. Minutes later, however, a massive sell off began. The price of LTX dropped from $0.60 to $0.11 almost instantaneously as more than 210,000 tokens were sold. The cumulative clause was invoked and Lattice stakeholders were left to deal with the consequences of what appeared to be an orchestrated dump.
Analysts later confirmed that LTX tokens had indeed been funneled into private accounts and the event had been synchronized. All three centralized exchanges had been complicit and, despite a reimbursement of the cumulative clause resources, proceeded to delist LTX as retribution after the scheme on their part was made evident.
Ironically, Lattice Exchange’s value proposition is a direct challenge to centralized exchanges’ ability to conduct the kind of predatory behavior seen in the LTX IEO. Co-founder and CEO Ben Jorgensen shared his ideas on the project’s potential in a recent interview and explained how his work with Constellation Network is instrumental to the new decentralized exchange and what it offers.
Lattice promises to provide faster settlements on trades, loans, swaps, and other DeFi transactions by handling them on a graph-based database in the Constellation Network blockchain. As the white paper explains, an integration like this would not only solve latency issues and lower transaction costs for DeFi users but also provide greater interoperability, scalability, and access to asset-specific AMMs. An issue that affects current decentralized exchange options. More importantly, it would guarantee that these exchanges have access to deeper liquidity pools that can rival those of centralized counterparts.
For Jorgensen, these changes are an opportunity to build in the direction of community ownership and the values that first brought him to the nascent industry. “Our platform will be released at the beginning of December, and early next year we will introduce the governance of our network, which we are pushing to be fully decentralized and be owned by the community that owns Lattice tokens. We want them to be responsible for creating value in the exchange,” he said.
Investors have been firm in backing these goals. The exchange’s private investment round counted on votes of confidence by the likes of GDA Capital, FBG Capital, Alphabit, Hillrise Capital, and Moonrock Capital. These partners have already rolled out an action plan to assist Lattice stakeholders and the community.
Despite the unfortunate experiences with current IEO models and incumbent platforms, technology such as Lattice’s is set to bring viable, decentralized alternatives to centralized exchanges and their practices.