Blockchain

What is Serum? A DeFi Derivatives DEX Guide

DeFi-based exchanges have seen wild success in 2020 thanks to yield farming, which has incentivized hundreds of thousands of users to provide liquidity to these platforms. With that being said, DEXs are still a far-cry from centralized exchanges in both UI and UX. Serum is here to change all that.

Serum is a protocol that claims to be “pure DeFi” as they have managed to address a lot of issues the space is facing.

Most of the users in DeFi today are not traders but yield farmers. Yield farmers are vital since they provide liquidity, but they are a means to an end. The goal has always been to allow decentralized exchanges to be on par with or surpass centralized exchanges.

And so far, that hasn’t happened yet.

Serum aims to be a completely trustless and non-custodial exchange that can offer users the same level of experience as centralized exchanges.

Table of Contents

Background

Project Serum is a DEX project to be launched by a leading exchange and derivatives platform, FTX. According to their whitepaper, the founders are a team of experts in “cryptocurrencies, trading, and decentralized finance”.

Their partners and advisors are a consortium of trading and DeFi experts coming from various projects across the space including Kyber Network, Compound, TomoChain, etc.

What is Serum?

Serum is a decentralized exchange (DEX) that offers cross-chain trading at a speed and efficiency that rivals centralized exchanges. It will run on the Solana blockchain but will be fully interoperable with Ethereum as well as Bitcoin.

There are several factors that make Serum unique. For one thing, it is a DeFi protocol that is non-native to Ethereum, which is quite rare. However, it is still integrated with the Ethereum blockchain and is fully functional with ERC-20 tokens.

This means that it doesn’t need to wait for Ethereum 2.0 to scale since Solana is already scalable. Users can expect the same speed as a centralized exchange, even if it isn’t.

Serum is fully decentralized down to the core protocol, unlike most DeFi platforms today. In fact, it doesn’t utilize oracle price feeds at all.

Solana

Solana is a high-throughput blockchain with a target of reaching potentially 710,000 transactions per second (tps). At present, this blockchain can handle 50,000 tps, which is over 3,000 times faster than Ethereum. And it can do all that without the need for sharding.

Instead, Solana uses a novel consensus mechanism called Proof of History (PoH) alongside Proof of Stake (PoS) in order to scale. And this level of scale allows the blockchain to handle multiple settlement cycles per second at ultra-low costs.

The level of efficiency and scale of Solana’s blockchain is the key to making Serum the first DEX with all the perks of a centralized exchange. With this in mind, one could anticipate that Serum might actually allow DeFi platforms to drive centralized exchanges off the market.

Additionally, the Solana blockchain has a native token standard called SPL tokens.

Advantages of Serum

Serum has several advantages over other DeFi-based exchanges at the moment.

Speed and Cost

DeFi might have exploded in popularity and usage, but that doesn’t mean it doesn’t have any drawbacks. If anything, its exponential growth has actually made the Ethereum network slower and gas fees higher. And this explains why centralized exchanges still vastly outnumber DEXs despite their custodial arrangement.

Most people would want full control over their assets. However, most of them are also willing to sacrifice all that in exchange for better service. They want the speedy low-cost trading that centralized exchanges offer.

And Serum has all that despite being a DEX.

Decentralization

Chainlink is popular among DeFi protocols for a reason. That’s because almost every DEX requires oracles to feed external price data to its blockchain in order to work.

Oracles have, in one way or another, some centralized aspects to them, which vary from protocol to protocol. It could be a liquidation price oracle that connects to a centralized exchange API, or something else.

Some teams like the Ampleforth founders still hold the keys to their protocol, which is as centralized as it gets. But Serum has none of those.

It aims to be a pure DeFi protocol that stays true to its terminology. Despite the fact that a fully-decentralized protocol is very computationally intensive, Serum can run smoothly thanks to Solana’s scaling capabilities.

Cross-chain Support

There are many types of cross-chain programs implemented in different protocols including atomic swap, Thorchain, etc. Most if not all of them have one thing in common: a little bit of centralization. Whether it’s a council of token holders or an oracle, it works on the assumption that people are honest.

Although there are some setups in place to prevent bad actors, it’s still not tamper-proof. And this is what Serum is trying to disrupt. It offers a fast DEX with cross-chain support without the need for oracles nor tribunals.

With Serum, you could trustlessly swap assets between different chains. You can trade your BTC with ETH or any other ERC-20 token and vice versa.

Great UI and UX

DEXs have come a long way since the early days of Etherdelta where the order books were thin and interfaces were clunky. With that being said, it still has tremendous room for improvement in terms of user interface (UI) and user experience (UX).

But they are still not on par with centralized exchanges. Serum is intended to have the same quality of UI and UX that exchanges like Binance and Bitfinex have.

Uniswap popularized trading without orderbooks and using AMMs (automated market makers) instead. AMM is not bad but it’s not a substitute for the essential trading features that orderbooks have. It has no limit orders nor bids and offers.

Orderbooks allow traders to control the price, size, and direction they want to trade. And Serum has all these essential tools for its users.

Normally, this wouldn’t be feasible with Ethereum’s present network capacity. This is the reason why Serum runs on Solana.

SRM

SRM logo

SRM is Serum’s native token which gives holders governance power over the network. The whitepaper indicates that is will serve as a governance token for the system. While most components of the Serum ecosystem are immutable, some non-critical parameters, like future fees, can be modified via SRM governance votes.

Furthermore, all of the net fees in the exchange will be used to buy and burn SRM tokens.

Besides governance, here are some of SRM’s utilities:

  • Holding SRM gives users up to 50% discount off all fees
  • SRM can be used to pay fees
  • SRM can be staked

MSRM

MSRM (MegaSerum) is simply 1 million SRM tokens stacked together. According to Serum’s website, it is “a scarce asset that gives increased utility to core believers in Serum.”

Staking

SRN and MSRM can be used to stake on a node. The Serum staking mechanism requires a node to have atleast 10 million SRM and one MSRM. These nodes will receive a portion of the fees of cross-chain transactions that they provide insurance for.

Wrapped tokens

Serum also has native token wrappers that can be used to create wrapped tokens SerumBTC and SerumUSD. Wrapped tokens are assets that are hosted on another blockchain with its price pegged to its underlying asset. WBTC, for instance, is an ERC-20 token with BTC as its underlying asset.

Some individuals are concerned with wrapped tokens since they follow a centralized model, depending on a consortium of institutions with various roles in the system. Serum changes all that.

SerumBTC and SerumUSD are both SPL and ERC-20 tokenizations of USD and BTC, respectively. SerumBTC is a fully trustless BTC token. SerumUSD, on the other hand, is a decentralized stablecoin with no single point of failure.

Conclusion

All things considered, Serum seems to be very promising. It is trustless and non-custodial yet also fast, cheap and offers the full suite of trading tools centralized exchanges have. Not to mention it offers derivatives trading and leverage.

Furthermore, it scales more than almost any DeFi platform in existence. And a lot of these magnificent features are made possible by the Solana blockchain. Some might see this as a concern since, well, Solana is not Ethereum. And Ethereum is worshipped in DeFi.

However, only time will tell whether this “decentralized and scalable blockchain” can actually live up to what Serum is claiming.

Source: https://www.asiacryptotoday.com/serum-srm-guide/

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