The concept of decentralized exchanges gained popularity with the rise of Ethereum and its ability to support smart contracts. Decentralized finance (DeFi) leverages smart contract functionality to create decentralized financial services, sparking the creation of numerous decentralized financial protocols, exchanges, and instruments. This movement aims to provide users with greater control over their assets and recreate traditional financial systems in a private, secure, decentralized, and trustless manner.
DEXes are integral components of the DeFi ecosystem, providing infrastructure for decentralized trading, liquidity provision, and other financial services on blockchain platforms. However, as many innovative DEX designs emerged with different unique approaches to achieving decentralization while facilitating peer-to-peer trading (examples include On-chain order book DEX, Automated Market Maker (AMM) DEX, Offchain order relay DEX, Layer-2 DEX, and cross-chain DEXes), they also introduced trade-offs that gave rise to two prevailing issues: price inefficiency and lack of user privacy.
To address these challenges, the development of Common became imperative. Common, currently being developed by Cardinal Cryptography, aims to offer a DeFi solution providing access to robust on-chain privacy features, combining the simplicity of centralized exchanges with the decentralized ethos of a DEX, ensuring that users can trade privately with ease and giving them the most optimal prices out there in the market.
Why Common?
People opt for centralized exchanges (CEXs) due to ease of use, abundant liquidity they offer through aggregation, providing a larger pool of trading opportunities compared to decentralized exchanges (DEXs), and because the only party that knows a user's transaction detail is the central authority running the exchange. This is in contrast to decentralized exchanges where transactions are often more transparent and "naked" on the blockchain, revealing sensitive transaction data.
What Common aims to do is to operate as an order book model combined with advanced cryptographic primitives such as ZK-SNARKS and Decryption Oracles to safeguard user information during trades. Common employs ZK-SNARKs, ensuring anonymity by enabling users to prove possession of essential data without revealing the data itself. This process allows users to demonstrate ownership of certain data (e.g., traded amount or wallet balance) without revealing the sensitive information itself. It provides a strong level of privacy and confidentiality in financial transactions while still allowing verification of the integrity of the data.
Decryption Oracle and MPC: Guardians of Confidentiality
The Decryption Oracle operates in conjunction with other cryptographic techniques, decrypting information related to users' trades securely. Its instantiation through MPC ensures joint computation without revealing sensitive inputs. The decryption Oracle and Multi-party Computation (MPC) are a vital force in safeguarding confidentiality. Acting like a secret agent, the Decryption Oracle ensures that encrypted trade details are revealed securely, all while keeping personal information private.
On the other hand, MPC is like a cryptographic team effort, allowing different players – traders and the exchange itself – to work together on trade computations without exposing individual details. This dynamic duo, the Decryption Oracle and MPC lets everyone involved in trading collectively perform necessary functions like settlements and order matching without revealing sensitive details. This teamwork, crucial in privacy-focused DEXs like Common where users value confidentiality, ensures that trade-related operations are securely computed, keeping the exchange working on encrypted or private data. Through this collaborative approach, Common executes trades without handling or disclosing specific transaction details, providing users with an extra layer of privacy and confidentiality in on-chain financial activities.
The amalgamation of ZK-SNARKs, MPC, and the Decryption Oracle ensures a notable level of confidentiality over the amounts involved in trades. This approach goes beyond traditional zero-knowledge proofs, emphasizing a commitment to user privacy.
Integration with Shielded Token Pool
Common seamlessly integrates with a shielded token pool, enabling users to place orders without exiting the shielded pool. The Decryption Oracle ensures the confidentiality of trade information, contributing to the platform's dedication to user privacy.
Fairness Through Aggregated Value and MEV Protection
The privacy and fairness of trades are elevated through an innovative mechanism involving the aggregated value of multiple orders. This value remains undisclosed until the crucial moment of order matching, safeguarding against Miner Extractable Value (MEV) exploitation. The Miner Extractable Value refers to the potential profit that miners can extract from the order of transactions in a block beyond the block reward and transaction fees. It arises due to the ability of miners to control the order and inclusion of transactions when they mine a block.
The concern stems from the ability of miners and validators to influence the order of transactions within a block, creating economic opportunities for them. This strategic positioning enables miners to extract additional value beyond traditional block rewards and transaction fees. The consequence is a competitive environment where users may find themselves compelled to pay higher gas fees to prioritize their transactions, especially for time-sensitive or dependent transactions. This phenomenon is often labeled as an "invisible tax" within the web3 ecosystem, reflecting the indirect costs users bear as a result of the economic strategies employed by miners. MEV challenges the ideal of a fair and transparent decentralized network, introducing complexities that impact user experiences and perceptions of trustlessness within the blockchain space.
Common's MEV mitigation strategy centers around a unique implementation of batching in its decentralized exchange (DEX). Using an order-book model, trades are initially submitted as limit orders with undisclosed amounts and holders. The platform then internally matches these orders within a batch, maintaining privacy. Only after this matching process is complete does the batch become public. This approach aims to make it considerably more challenging for MEV agents to exploit the information, as they are exposed to the details of the trades only after the private matching occurs. By incorporating privacy into the batching technique, Common seeks to minimize the risk of Miner Extractable Value manipulation in its DEX.
Swap engine process:
Before unveiling the aggregated value, the batch of orders is securely sealed, preventing manipulation by specialized actors. The process then transitions to Common's SWAP-ENGINE, a MEV-aware component designed for optimal trading in two distinct phases:
1. Internal Matching Phase:
The Internal Matching Phase directly matches and settles users' orders and trades within the protocol, all while without incurring gas fees.
2. Dutch Auction Phase:
The remaining funds undergo a public auction starting from a less attractive price, gradually decreasing block by block. This strategic approach encourages Market Makers to participate, promoting liquidity aggregation from on-chain and off-chain sources. Importantly, this mechanism ensures a substantial portion of MEV profits is redirected back to the users of the Common platform, emphasizing a fair and user-centric approach to decentralized trading.
Conclusion
Common stands out in the decentralized exchange (DEX) landscape through its seamless integration of an order book with a shielded token pool, ensuring user anonymity. By employing advanced cryptographic techniques such as ZK-SNARKs, order batching, and Multiparty Computation (MPC), Common takes an extra step in concealing the values within orders. This commitment to keeping users within the shielded pool throughout their transactions significantly enhances the overall privacy framework. The amalgamation of these features positions Common as a platform that not only prioritizes privacy but also implements robust mechanisms to safeguard user data, providing a high level of confidentiality in the decentralized trading experience. It's noteworthy that Common's compliance with the privacy layer is inherited from the well-designed Aleph Zero’s ZK- and sMPC-powered privacy engine.
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