...by Daniel Szego
quote
"Simplicity is the ultimate sophistication."
Leonardo da Vinci

Saturday, October 13, 2018

On the need of zero knowledge order book matching algorithms


There are many ideas for implementing a decentralized exchange protocol on blockchain. As it might be realized naturally with the help of a quorum consensus, it is not so much easy with a Nakamoto one. The problem is that in a Nakamoto consensus, a leader is choosen in each round to create and start propagating the next block. This leader will act as a dictator for the certain block, meaning that it can influence the transactions that will be minded into the block. It might be a DEX realization idea to create sell and buy orders and transactions and realize the matching algorithm with the help of mining, however it can be "gamed" very strongly in a Nakamoto consensus by the given miner. Hence, buying and selling orders can be "gamed" by the rest of the network, like the transactions themself can be delayed or censored. A solution to these problems might be the definition of zero knowledge order matching algorithms, where the creator of the order, and the exact amounts or other order details are hidden by cryptography. Certainly, it is an open question if efficient order book matching algorithms can be defined in such a way.