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A casual observer might think that Switcheo’s decentralized exchange materialized from emptiness. In November 2017, Switcheo’s Singapore-based development team put together a prototype decentralized token exchange to enter the first City of Zion dApps competition. The team’s efforts were fruitful, as Switcheo captured ninth place in a talented pool of entries.

After this initial success, Switcheo hit the ground running. A strategic partnership with NEO Global Capital the following February preceded a successful public token sale held in March of 2018. Fundraising efforts did not serve as a distraction to the project but instead paved the way for Switcheo to deploy its first exchange smart contract on NEO’s MainNet. The March 31st, 2018 exchange launch gave Switcheo’s relatively unknown project first mover status against well-funded and well-connected competitors.

Switcheo has followed up its early start by releasing a series of updates, new code, and development plans, completing many of its development goals on schedule. Over the past year, Switcheo has become known as the de facto exchange for NEP-5 tokens, and more recently has expanded its offerings to include Ethereum ERC-20 markets.

NEO News Today’s Colin Closser reached across the globe to speak with Switcheo CEO and co-founder Ivan Poon.

NNT – Colin: We’re doing this interview because it’s been a year since your exchange went live on MainNet, is that correct?

Ivan Poon, Switcheo Exchange: That’s correct. We actually started in 2017 with our MVP in the City of Zion competition. But Switcheo Exchange, fully usable, was launched exactly one year ago, on the 31st of March.

Colin: Okay. So I was looking at that competition. It’s interesting to see the other projects that applied to it. But one thing I noticed about yours is that the user interface looks almost the same as it does when you submitted. How did you come up with a design for your exchange that you are able to stick with though development?

Ivan: I think fundamentally, we knew how we wanted our exchange to look from the start. It’s pretty similar to the exchanges we have been trading on. And that’s why so far all the changes have been improvements and adjustments, rather than an overhaul of the whole interface.

I think the biggest change we have had so far was the wallet manager, because as we started adding more blockchains, we realized there’s really not enough space. So on version 2 of our exchange interface, there was this wallet manager popup window where you can actually see tokens from all the blockchains that we support.

Colin: What else is fundamental to a good DEX from the design side?

Ivan: Because decentralized exchanges, or DEXs, are sort of the newcomers, I think it’s really important not to have the user re-learn how to use the exchange. So I think a lot of the design aspects are sort of copied–or we followed what the current centralized exchanges are using. I think that’s very important, you don’t want users to need training, because you will lose a lot of users in that way.

Especially because there’s a couple of new concepts when using a DEX. You’re using your wallet, you deposit into the smart contract, stuff like that.

Colin: That’s the main reason you launched Switcheo Account, is to try and give people a centralized-style experience?

Ivan: Yes, definitely. So Switcheo Account is an interesting one. It was one of our developers who really led the charge on this.

The whole idea is we realized that through some careful cryptography and well-thought-out architecture, we can actually let the front-end app create the wallets on behalf of the user in the background. So it’s still non-custodial. We then designed the interface to appear like a centralized exchange, where you actually deposit to a certain address.

The front-end app is the one that actually does all the things we’re doing in the background for the user. So we abstract away all the DEX concepts. It’s really innovative, you should try it out. It’s really similar to Binance, Bithumb, or others.

Colin: I noticed one of the things about Switcheo Account is that, unlike with a standard wallet login, you can withdraw using Switcheo Account to other addresses. Is that correct?

Ivan: So what it does is actually a two-step procedure. The front-end app withdraws from the smart contract and then it does the transfer to another address. So fundamentally, it’s still using the same DEX contract, but we just hide certain steps. We automate it for the user of the front-end client.

Colin: To withdraw to another address, first it withdraws from the smart contract, then it signs the transaction?

Ivan: Correct. It signs the actual transfer, the transaction. So the communication at the back-end is actually quite key. The front-end app doesn’t have a lot of data, so we don’t want to double withdraw. The communication with the back-end makes sure that it does what the user wants it to only once, and the front-end app doesn’t get confused or anything like that.

So the user’s private keys of wallets are never sent to the back-end. All the Switcheo back-end does is guide the front-end client along.

Colin: It’s interesting that you’re still concerned with double withdrawals. Because I was reading your interview with City of Zion for the competition a year and a half ago and you were worried about it then, too.

Ivan: Well, I think it was a bit different there. The double withdrawal you’re talking about was for the smart contract, back then. And that’s a solved problem, basically.

What I’m talking about here is a double transfer. And that’s still a problem on wallets, say, MetaMask, where if you hit the withdraw button twice, because it appears the transaction didn’t go through, you do a double send. And that’s a front-end, user interface issue. Not so much a smart contract issue.

Colin: That makes sense.

Let’s talk a little about the fees and the fee structure for your exchange, because that underlies the whole business case. A lot of exchanges recently, Gemini, Coinbase, Binance, have been raising their fees. And yours are higher too now, but you still have free market-making. I assume that’s to encourage liquidity?

Ivan: Right. So we have negative maker fees on Ethereum pairs, meaning to encourage liquidity, we rebate some of the fees to market makers on Ethereum pairs. Internally, we have been discussing about fees quite a lot, whether we should increase the maker fees or reduce the taker fees.

But at the end of the day they’re still interconnected and in this case it’s quite clear who has to come first, and that’s the market makers. We still think that this model works for us, for now, where the order maker is compensated a bit more than the order taker.

Colin: What’s your goal with setting some of the fees, besides revenue? Are you trying to make a usable market or higher volume? Or maybe that people don’t have to buy Switcheo’s token to use the exchange?

Ivan: I think the primary goal is to add liquidity to the order books. No matter how we spin it, that’s the most important thing: We need a thick order book with minimum spread. Only then can we start attracting takers with reduced fees or referral programs.

Because we know that if you visit an exchange, and you see that the order book is filled with small orders, or the order book’s thin, you won’t even deposit the tokens into the exchange. You’re lost from the start.

Colin: I guess a lot of casual traders, they’re primarily takers. So it makes sense that if they don’t see it already on the books, they would just move on.

Ivan: Yes.

Colin: The Switcheo token [SWTH], it’s still burned, when you collect it as a fee, right?

Ivan: Yes. We haven’t changed the model for that. If you use SWTH tokens as an order taker, the tokens are burned, and you get a discount of 25%, from 0.2% to 0.15% of the fees. So for the Ethereum chain, because it’s a different chain [than the NEO-based SWTH token], with our atomic swap and our cross-chain technology that’s just been finished, pretty soon we are going to start allowing users to burn Switcheo tokens on the NEO blockchain while trading on Ethereum’s pairs.

So for the past few months we have been doing that manually, similarly to how Binance does it, where we buy back and burn the tokens. But we are going to change that model soon and users will burn tokens on their own through the smart contracts.

Colin: Traders who don’t use your token to get a reduction, then you end up with blockchain assets as your profit. Do you have a preference? Because you have to burn the SWTH token when you receive it, so it’s more profitable to receive the full fee, right?

Ivan: At this moment we actually prefer users to burn tokens, and that’s because we hold a lot of our own tokens, too. We’re incentivized to get rid of as many tokens as possible. In terms of our own capital, because we raised a good amount of funds during our ICO, that’s not so much of a concern.

Colin: Switcheo originally planned integration with the QTUM blockchain as well. And a couple weeks ago, you had an EOS tab on the last iteration of your previous version. Now those are gone. Are you still planning to offer markets on those chains, or did you see something that you didn’t like?

Ivan: For QTUM, we started integrating, but then we got caught up in a lot of other more pressing issues that we thought would be better for our trade volume, like Switcheo Account. That’s why QTUM has been really slow. For the EOS tab, I think that someone accidentally pushed out the tab. But, EOS is going to be the next blockchain on which we are going to launch, and I think we will announce it officially very soon.

The reason why EOS is going out first is that we are actually working with a partner on that, which sped up development a lot. And this might change, but we are hoping for an April launch for EOS.

Colin: And what about cross-chain? I know that this is bleeding-edge technology. Right now, there’s what, three exchanges currently doing atomic swaps? Two?

Ivan: For cross-chain, there’s two points of interest for us: Atomic swaps, and then Switcheo Chain, a sort of side-chain. For the Switcheo Chain, we are pushing for a beta sometime in the next quarter [Q2 2019], and for the atomic swaps, I think it should be launched…well, we’ve done the back-end work for it, and we are just making sure the UI is very polished and doesn’t confuse users. For that I think we are looking at a mid-April timeline.

Colin: That’s pretty fast.

About the NEO blockchain, you said you’re moving to Switcheo Chain eventually and mentioned the beta coming, but for the time being, a lot of your volume is still on NEO.

Ivan: I’m not sure if you have seen it, but we have been looking at the Ethereum volume for a long time since we launched. Part of the problem with Ethereum is that we are not the first kids on the block. So there’s IDEX, there’s a lot of centralized exchanges. So we’re analyzing how to attract liquidity.

What we realized is that the tokens on Ethereum, no matter how much incentive we give to market makers, if the token is considered too risky, it’s either going to be very expensive for market makers, or even if you contract it to a third party liquidity provider, it’s going to be very expensive due to the exposure risk of holding those tokens. For us, even if we do market making ourselves, it’s going to be very expensive for us. It doesn’t make sense to hold so many different types of tokens.

We reduced our offerings to only those tokens that we feel confident that market makers will be willing to provide liquidity for. Because if market makers don’t pick up those tokens, we would be required to pay for the market makers to offer those markets.

Colin: I never thought about how that, how traders don’t want to take heavy exposure to ERC-20s. That makes sense.

Ivan: We also listed quite a few exchange tokens, because ironically, the exchange tokens have some of the best utility at this moment. There are some other non-exchange tokens that are really strong as well, like Augur’s REP token. Those are the markets that we feel quite confident about.

Colin: What has your impression been of the NEO markets? Because you’re running on a smart contract on NEO. NEO has had its problems in the last year performance-wise, in my opinion. But it seems like your exchange has had good performance.

Ivan: That’s because of the architecture that we have, where we are able to do the broadcasting asynchronously. The first version of our exchange broadcast its transactions immediately. And if the blockchain is not lively, meaning the blocks are delayed, or slow, that causes a lot of problems for traders. In the newer versions of Switcheo, where transactions were broadcast asynchronously, I think that helped us a lot.

On that topic, I’m quite excited for NEO in the upcoming weeks. So right now, the consensus nodes for NEO are running on 2.9.1. Which is an old version. And recently NEO has launched 2.10, which has six months of development work in it. On TestNet, they’ve run it for two weeks, and next week is the end of the testing period. Hopefully we’ll see that upgrade deployed to MainNet in the first two weeks of April.

I think that will improve the liveliness, the performance, of the NEO blockchain a lot. In fact, Switcheo has been testing it internally, and it has done well on our hardware. The performance has been pretty good. So we hope that NGD, or NEO basically, will apply this to their consensus nodes soon. I think a lot of people’s problems will go away as a result.

Colin: In the meantime, I’ve been pretty impressed with how I have still been able to use your exchange, even when NEO blockchain is pushing empty blocks. Two out of three blocks are empty because they’re not filling with transactions, but I was still able to transact on your exchange. And that’s because of the asynchronous transaction broadcasts?

Ivan: Correct. Basically, we have the back-end architecture to reach NEO and keep trying to broadcast our transactions, and do the state transitions that are required by our smart contract.

Colin: Lately, there was the EtherDelta ruling by the SEC, which I’m sure you know about. Not being in the US, that really gives you a lot of cover from those types of decisions. The EtherDelta founder was based in the United States. Do you have any insight, it’s certainly changed your industry, right?

Ivan: Regulations are different and confusing across all of the jurisdictions. However, we try to mitigate the possibility of any issues. For example, some of the gambling tokens that we have, we don’t allow Singapore users to trade those markets because Singapore has quite strict gambling laws. And for the sort of tokens that we feel might cause problems, like in the USA, we have blocked those regions.

Colin: Are there any other measures that you’ve taken to comply with global regulations? Because regulations are usually unclear, and sometimes they don’t exist. And globally there’s more than a hundred jurisdictions.

Ivan: If and when it becomes clear laws dictate we have to take action, we will definitely make adjustments. I think our engineers are quite capable of moving quite quickly on this. And I think of how regulations, and authorities, usually work, especially in Singapore: When introducing a new law, you do have time to adjust, and they’re not just going to shut you down because you’re suddenly in violation. As long as we are not doing something that is illegal currently, I think it’s fine.

Colin: One other thing I wanted to mention. There has been some competition in the NEO arena, because there are three decentralized exchanges, either running, or in development. I interviewed the Aphelion founder a few months ago and they’re full of opinions, and NEX is making a lot of noise about their upcoming product, but it seems like Switcheo has just been pushing out updates. Is that a conscious strategy, or is that just your personality?

Ivan: So. I like to walk the walk. We have a very engineering-focused culture, more than a marketing culture. It’s a bit different from most of the crypto space. But I think that’s what is going to truly advance the distributed ledger technology movement. So that’s what we have been really doing.

I can’t really speak for the other decentralized exchanges. But we think we are in a good place, and I think we can come out on top, regardless of whatever they’ve been doing.

We will be coming out with a roadmap sometime in the next few weeks for the upcoming quarter, because the last one we did was at the start of the quarter.

Colin: Well, happy birthday for your exchange! And keep developing, because it’s been fun to watch you.

Ivan Poon is the co-founder and CEO of Switcheo Exchange.