One of the common problems with Decentralized exchanges is front-running. Wikipedia defines this as,
“Front running, also known as tailgating, is the prohibited practise of entering into an equity (stock) trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large (“block”) pending transaction that will influence the price of the underlying security.”
In DEX world, front-running happens a little differently, and rather than working on nonpublic information, you get to work with publicly available orderbook, slipping in the order at the very last minute — though technically at the very last second.
This problem does not happen in a centralized exchange because the only people who know the incoming list of orders are the owners themselves. In the case of DEX running on a blockchain, this is public data, and anyone can go through the broadcasted orders in smart contract. It takes a while for these orders to get confirmed in the blockchain. The trader exploits this situation because the orderbook is tightly coupled with the gas fees for executing the transaction. By setting a higher fee for his transaction, the trader makes a profitable trade ahead of others in the queue.
Since this action is happening with publicly available data, illegality does not arise because you are not technically shorting the system with inside information. This handicap, however, is a massive disadvantage for DEXs. Professional traders with superior computing power and fast trading bots can easily apply front running to make profitable trades by watching the incoming transactions in smart contract.
Polkadex hopes to solve the problem by introducing feeless transactions. This innovation not only takes away the power to control the order of execution; it also eliminates economic incentive to do so. It allows faster trade execution times and also gives equal opportunity for anyone placing a transaction on the orderbook.
While this is economically impossible to apply on general-purpose public blockchains that run on an incentivized model for network participation, it is certainly possible on an application-specific blockchain network. Polkadex, being an application-specific blockchain, has the flexibility to get creative with network incentive model. We have done it and beautifully so!
As far as Polkadex is concerned, any transaction that is inserted into its network is connected with an exchange activity. It could be to place an order or to delete an order. This predictability gives a tremendous advantage to ascertain if the transaction is genuine or not. With an intelligent application of basic AI and machine learning algorithm, we can quickly identify someone who is trying to abuse the network. This innovation makes it possible to allow genuine transactions and penalize the bad ones. If someone tries to abuse the network by incorrect information or denial of service, the network imposes a fee which on a large scale becomes economically impractical to the attacker. In turn, this makes it possible for Polkadex to allow feeless transactions for all genuine activities on its blockchain.
High Frequency Trading bot
Another application of feeless transactions is high-frequency trading(HFT). Usually, the cancellation of trades in HFT is widespread when you engage trading bots to enter positions. In normal circumstances, the network has to impose a fee. This cost leads to expensive cancellations, and hence, trading becomes prohibitive for HFT bots while operating on a DEX. Feeless transactions eliminate this problem and allow for faster trades and settlements. Polkadex uses this to enable endpoints for third-party market makers and trading bot communities to connect to the orderbook and engage seamlessly. By using our cloud architecture, the experience is even better and gives the feeling that they are trading on a traditional centralized exchange.
Hence, feeless transactions in Polkadex play a vital role in eliminating two major issues that are widely seen in other Decentralized exchanges.