After the collapse of FTX, crypto traders have been looking for decentralized, non-custodial and safer ways to execute orders and store their assets. This explains why some decentralized crypto exchanges (DEXs) like Brine Fi are getting investor interest even as VCs across the board continue to keep off the digital asset industry.
Brine is announcing a $16.5 million Series A at a post-money valuation of $100 million as investors appear bullish about the new orderbook-based decentralized exchange. The DEX, of which "mainnet," or its fully operational network, launched merely weeks ago and has already accumulated $500 million in trading volume, according to stats from Starkware, the Ethereum scaling solution that powers Brine.
DEXs, as the name implies, carry out transactions purely on blockchains, a contrast to centralized exchanges (CEXs) that include consumer household names like FTX, Binance and Coinbase, which Brine sees as its closest competitors. Traders might choose DEX not just for full custody over their assets but for privacy -- CEXs are normally required to undergo know-your-customer or KYC with local regulators, whereas regulations around DEXs are still largely undefined due to the lack of a central party.
“While they are the safest way to trade, many traders opted for a CEX to counter higher trading fees on DEXs, price slippage, transaction fees ($5-$25 per transaction), liquidity issues, the absence of an orderbook, transaction delays and an inability to provide privacy on orders causing front-running attacks. All things that can impact profit margins and substantially increase the uncertainty of specific trades,” said Shaaran Lakshminarayanan, Brine Fi co-founder, in a written response to TechCrunch.
“Keeping all these points in mind, we’ve built Brine Fi to let traders experience the best of both worlds, get access to the merits of a DEX and a CEX at the same place. Moreover, high volume traders and institutions don’t need to worry about front-running attacks anymore as we provide complete privacy on orders by using zkP (Zero Knowledge Proofs) technology which is backed by Starkware.”
Orderbook and zero knowledge
That’s a mouthful of crypto jargon -- the takeaway is that Brine has found a way to provide the benefits of CEX that aren't normally available in DEX. One of these is an orderbook.
An orderbook, as in a traditional stock market, matches buyers and sellers based on price and quantity. It allows for types of orders not possible on a DEX, which are ideal for institutional traders because it lets them better manage their positions under different market conditions and minimize slippage, the different trade execution price than intended.
DEXs such as Uniswap, on the other hand, operate on a completely different principle. Instead of matching buyers and sellers, DEXs allow traders to exchange one type of asset for another by interacting with a pool of liquidity. So rather than having prices be determined by other traders, prices are set by a mathematical formula used to maintain the overall value of the assets deposited by liquidity providers.
Brine says it's also able to prevent "frontrunning" for traders by leveraging zero-knowledge proof (ZKP), a cryptographic method that has been picking up steam recently as users look for more transactional privacy. The technique, which is a way of authenticating a statement without revealing the statement itself, allows a transaction to be verified on a DEX without revealing details of one's trading position.
The round was led by U.S.-based crypto investor Pantera Capital, with participation of Elevation Capital, Starkware Ltd., Spartan Capital, Goodwater Capital, Upsparks Ventures, Protofund Ventures and a number of angel investors.
Lakshminarayanan said Brine Fi is building for both retail and institutional traders. For the former, it's introduced a beginner mode and inked a deal with liquidity aggregation platforms like 0x to enable people to easily start trading. The DEX is going after institutions like crypto hedge funds looking to transition away from centralized exchanges, which are currently driving a big chunk of its transactions. During its testing phase between February and June this year, Brine claims to have processed 4 million transactions and surpassed a trading volume of more than $1.6 billion.
“Over the past month, Brine has been able to execute orders in milliseconds while remaining fully non-custodial. It has helped us onboard some of the largest hedge-funds, exchanges and high-frequency traders in the world by helping them diversify their asset allocation and mitigate counterparty risks,” said Lakshminarayanan, who co-founded Brine with the firm's CTO Bhavesh Praveen (CTO) and CDO Ritumbhara Bhatnagar.
As centralized exchanges like Binance continue to face regulatory scrutiny over their operations in the U.S. and claims of canvassing breaches and money laundering in France, DEXs also face a risk of misuse as they are not required to abide by any Know Your Customer (KYC) and AML (Anti-Money Laundering) regulations.
The founder suggested that regulations would require DEXs to forfeit user anonymity, which is one of the appeals for users who prefer decentralized exchanges in the first place.
“DEXs present an opportunity for unscrupulous bad actors to take advantage of the industry for money laundering purposes as well as other financial crimes. Because individual users don’t need to verify their identity or the source of their funds when they create an account with a decentralized exchange, it’s much easier for them to slip under the radar compared to traditional financial institutions. For this reason, many industry experts believe that it’s only a matter of time before decentralized exchanges find themselves subject to such regulations,” said Lakshminarayanan.
“With this in mind, it would be prudent for decentralized exchanges to recognize the potential for regulation and begin generating a framework for KYC and AML compliance in the event that it becomes required. At Brine we are already using providers such as Chainalysis and Merkle Science to ensure that we are taking the best measures to protect ourselves from such bad vectors,” he added.