DEXs, or decentralized exchanges, have been one of the few bright spots throughout the course of the last year. They led DeFi in gross income and kept being used consistently without stealing money from its users, unlike other of their centralized competitors who did this. Yet, while firmly establishing themselves as the trustless and open-access point for crypto, they did not live up to expectations in many ways.

A standard decentralized exchange (DEX) that is built on automated market makers (AMMs) has a number of problematic aspects. Uncertain price execution and maximum extractable value (MEV), both of which expose traders to the risks of sandwich attacks and front-running, are the two factors that cause traders the greatest anxiety.

Hashflow is a new kind of decentralized exchange (DEX) that allows traders to see the price of a deal before actually carrying it through. In place of a bonding curve, it provides prices to traders by means of a request-for-quote (RFQ) methodology in collaboration with experienced market makers. The solution takes advantage of signature-based pricing, which enables market makers to do computations related to price off-chain. This strategy provides MEV resistance, eliminates slippage, and grants access to cross-chain liquidity, all of which are deficiencies that are often seen in AMMs.

How does Hashflow work?

Varun Kumar, Victor Ionescu, and Vinod Raghavan laid the groundwork in 2020 for what would become Hashflow. Hashflow began in April 2021 as a private beta and officially opened to the public in August 2021. After its original introduction on Ethereum in early 2022, it has extended to include the cryptocurrencies of Arbitrum, Avalanche, BNB, Polygon, and Optimist.

Hashflow mechanism

Source: Hashflow whitepaper

Market makers and traders are the two primary constituencies involved in the Hashflow ecosystem.

Market makers

In conventional markets, market makers (MMs) are financial entities that have access to cash and supply price takers (traders) with bids and requests on assets. This enables price takers (traders) to exchange the assets in question.

Many of the professional market makers in the cryptocurrency industry, such as Wintermute, Jump Crypto, and GSR, have a tendency to concentrate their efforts on centralized exchanges, such as Binance and Coinbase, because these exchanges enable them to perform intensive and speedy computations off-chain. Market makers engage in cutthroat competition with one another in order to place bids and requests in order books utilizing individualized pricing methods. Profits for MMs come from the difference between the prices that they bid and the prices that they ask for an asset.

The introduction of automated market makers is one example of how cryptocurrencies have contributed to innovation in this sector. By the use of this method, any individual may supply liquidity for assets whose prices are based on a preset bonding curve. AMMs are an effective method for decentralizing the supply of liquidity; nevertheless, they do come with a number of significant downsides for both liquidity providers (LPs) and traders. The inefficiency of their use of money and loss of divergence are two problems that plague liquidity providers. The execution choices available to traders are quite restricted, and they are vulnerable to front-running in the form of sandwich attacks.

Hashflow is a protocol that creates a connection between on-chain traders and market makers operating off-chain. It provides solutions to issues such as unpredictable price execution and MEV front-running (sandwich attacks).

Traders are able to engage with the Hashflow protocol without the need for authorization in order to obtain a quotation to trade any asset that is listed (i.e., to buy ETH for 1,000 USDC). Hashflow will then forward the RFQ to the MMs, who will then do computations off-chain in order to evaluate which of their bids or offers is the most economical. The Hashflow protocol will search for the best price available and then provide it to the trader when the MMs have finished responding with their pricing.

Traders may then agree to trade at that price, or they might opt to withhold their participation in the market. In the event that the trader accepts the price within the allotted window of time, the assets are traded between the trader and the MM liquidity pool. Until that point, the trader is in complete and total possession of their assets at all times. There is no chance for front-running by MEV bots since the MM values assets are off-chain and cryptographically signs the quotation. Hence, there is no opportunity for front-running.

At the moment, the Hashflow core team is in charge of doing background checks on market makers and is the one responsible for granting access to those market makers. In addition to these requirements, the Hashflow Foundation necessitates the use of Know Your Customer (KYC) protocols and legally enforceable contracts. The goal, which is more long-term in nature, is to provide permissionless access to the process of becoming a market maker.

Traders

When traders make an order on the Hashflow platform, they are actually placing a request-for-quote (RFQ) with MMs. Off-chain transactions are used to determine prices, and market makers validate and sign quotations. When the Hashflow router has optimized for the best possible quotation, traders have the option of either agreeing to carry out the deal or declining to do so.

There are a number of advantages that traders may take advantage of using the Hashflow protocol:

Instead of selecting a maximum slippage tolerance, guaranteed price execution is provided instead.
Less of a gap between prices: MMs are able to price assets in a manner that is more comparable to their true market worth as opposed to using a bonding curve.
MEV-resistance: There will be no front-running via the use of sandwich attacks or chemical battles.

Traders have the ability to natively trade assets between chains without the need for any external bridges (Wormhole works in the backend for message-passing).

Traders also have the option to activate gasless trading, which is an alternative method. As a result of the fact that this feature incorporates gas costs into the quotation, traders are exempt from the need they own the native asset of a particular chain.

There will probably not be any fees associated with trading for the foreseeable future, but, the DAO has the ability to implement fees at some point in the future.

HFT token

Hashflow's Ethereum-based ERC-20 governance token, HFT, was first made available for purchase in November 2022. During the token generation event (TGE), approximately 17.5% of the total supply, or 175 million HFT, was released and distributed to various community members (NFT holders), users (traders, market makers, and liquidity providers), and exterior contributors outside of the "Ecosystem Development" allocation.

In addition to that, about 19.3 percent of the overall supply of HFT was allotted to the Hashflow team, with an additional 2.5 percent reserved for new hiring in the foreseeable future. These tokens have a cliff that lasts for one year and a vesting term that ranges from three to five years after that.

Hashflow made the announcement of its seed round shortly after the introduction of its Private Alpha in April 2021. The funding amount was $3.2 million, and Dragonfly Capital and Electric Capital were the firms that led the funding. Hashflow successfully completed a $25 million Series A funding round in July 2022, at which point the company had a value of $400 million. In addition to follow-on investments from Electric Capital and Dragonfly Capital, the Hashflow Series A designated a number of important market makers as stakeholders. These market makers include Jump Crypto, Wintermute, LedgerPrime, Altonomy, and GSR. Galaxy Digital, Coinbase, Balaji Srinivasan, and Jason Choi are some more notable investors in the cryptocurrency market. These investors have together been granted 25% of the whole HFT supply, which comes with a cliff term of one year and a vesting time of three years.

The "Ecosystem Development" category receives the biggest portion of the initial supply allotment. As a consequence of this, 53.2% of the entire HFT supply is going to be distributed among ecosystem partners, community members, the community treasury, and many other external stakeholders. The vesting timelines for the various stakeholders are not the same, and more than a third of the Ecosystem Development HFT has already been unlocked.

HFT tokenomics

Source: Hashflow whitepaper

In addition to this, the community treasury will be the only beneficiary of HFT's perpetual 4% inflation, which will begin in November 2026.

The Hashverse

Hashflow's gamified user introduction platform will be called The Hashverse when it finally launches in the near future. The architecture was developed with the intention of increasing the number of HFT holders as well as assisting new users in making full use of the protocol's capabilities. The Hashverse should, in addition to aiding in the expansion of the community, also contribute to an increase in the amount of trade activity that occurs on Hashflow.

Hashverse UI

Holders of HFT tokens have the ability to lock them in order to create a character for use in the game. Users will subsequently be able to accomplish jobs and quests in order to gain extra HFT and further improve their voting power. The purpose of the experience is to foster a sense of community while also providing possibilities for users to contribute to the network and earn HFT.

A look at traction and other important indicators

Since it was first introduced in August of 2021, the Hashflow platform has seen a total of $12.3 billion worth of transactions take place on it. Hashflow, much like the majority of other exchanges, has witnessed surges in volume around high-volatility events such as the Terra/LUNA collapse in May and the FTX collapse in November.

Ethereum commands the lion's share of volume, which is now hovering around 50%. BNB Chain (25%), Arbitrum (13%), and Avalanche (5%) capture the majority of the remaining traffic. Cross-chain swaps first became available in April 2022, and since then, they have been responsible for around 0.4% of the overall volume.

In addition to its primary user interface, Hashflow has been successful in attracting volume via interfaces with projects like the DEX aggregator 1inch, DefiLlama, Odos, OpenOcean, OKX, and Zerion, a smart wallet. In addition, Hashflow is now working with eight different market makers. Although some of the market makers have not been identified publicly as of yet, the team has announced a relationship with Wintermute and made mention of the presence of other Series A investors (i.e., LegderPrime, GSR, etc.).

Competitors landscape

Hashflow is competing with other services, primarily in the exchanges and bridge markets.

Exchanges

Even after the FTX catastrophe, CEXs continue to retain a considerable volume advantage over DEXs, doing between 7x and 10x the volume of what DEXs do. Centralized exchanges continue to comfortably exceed decentralized protocols, despite the limitations of counterparty risk, KYC-AML, and permission asset listings. The advantages of trading on CEXs, such as the simplicity of the execution process and the availability of limited order execution, have easily surpassed the hazards of centralization, which include censorship and the custody of assets.

These complexities give a chance for something better. Hashflow is substantially more decentralized and on-chain than CEXs, and it also provides confidence in execution, which is something that DEXs can not provide. Traders and capital allocators are able to keep assets and swap assets in a trustless way while still receiving the same pricing and guarantees as CEXs. In addition, traders and capital allocators do not have to pay any trading fees, and gas expenses in the swap execution are lowered.

Large traders, who are typically vulnerable to slippage and front-running as a result of MEV, may benefit tremendously from these benefits. It is possible to draw parallels between Hashflow and dYdX (in the rollup version that is currently available), both of which provide decentralized trading with centralized order execution. Users that place a high priority on decentralization in its totality may choose to avoid the hybrid DEX; nonetheless, it is quite probable that the bulk of users will place a high priority on execution while maintaining the self-custody of assets.

Due to the one-of-a-kind nature of Hashflow's trading platform, it is impossible to compare its volume to that of other DEXs. AMMs pull in a significant amount of extra volume due to the fact that they depend on takers exploiting arbitrage opportunities in order to maintain price stability. Sandwich attacks are responsible for as much as 20% of the volume of major DEX trading pairs. Hashflow, on the other hand, is dependent only on traders making requests for quotation prices.

Bridges

Users of a bridge are required to escrow tokens on chain A before receiving the wrapped form of those tokens on chain B. This is the standard workflow for users of a bridge. The dangers of storing wrapped tokens on a new chain and escrowing tokens on a native chain have resulted in significant hacks and losses for holders. These risks have been mitigated by storing wrapped tokens on a native chain. Users of Hashflow may quickly change from one native asset to another cross-chain without the requirement for wrapped assets or escrowing assets, thanks to the platform's functionality.

When users carry out cross-chain swaps with the assistance of Hashflow, they are exempt from the obligation of paying the gas costs that are associated with transactions carried out on the destination chain.

The element of the protocol that deals with cross-chain communications is carried out by Wormhole. Hashflow makes use of gateway contracts to ensure that the first step of a transaction has been carried out successfully. Hashflow already has contracts on a number of different chains, and it possesses the capability to add many more.

Despite the fact that Hashflow is a cross-chain DEX and not a bridge, it does compete with users who are interested in trading between chains.

For instance, Hashflow's competition consists of protocols such as Stargate Finance. Stargate Finance is a platform for Defi that promises to give customers an experience that is streamlined, safe, and user-friendly when it comes to trading, lending, and borrowing cryptocurrency. The platform takes advantage of the most recent developments in blockchain technology, such as cross-chain swaps and compatibility with other blockchain networks, in order to give users access to a diverse set of chances and alternatives for investment and yield farming. The pools system, as opposed to the RQF technique used by Hashflow, is what sets Stargate Finance apart from that project.

Future developments

Governance and Hashverse

The completion of the introduction of the Hashverse DAO is now at the forefront of Hashflow's priorities. Leading creative firm Superconductor is collaborating with the core development team to develop a one-of-a-kind experience by fusing together well-known crypto-primitives like NFTs, GameFi, and DAO governance. When it has been released, it will serve as a solid test case for a new approach to create a DeFi community and possibly improve DAO involvement. This will occur after the project has been launched.

Smart Order Routing (SOR)

The Hashflow router polls many market makers for pricing information and presents the trader with the most competitive offer. This method is restricted to just allowing full fills by a single MM. As SOR is made accessible, MMs will be able to return tiered prices for various transaction quantities, notwithstanding the size of the overall RFQ. After then, the Hashflow router is able to aggregate the many little orders and provide the traders with better pricing.

On-Ramping for Fiat

The need for users to bring their assets on-chain is a barrier for most decentralized exchanges. The implementation of an on-ramp feature will make it possible for users of Hashflow to bypass the intermediary step of bringing their assets on-chain before engaging in trade and instead engage in direct interaction with Hashflow.

Limit Order, TWAP, VWAP Chain Expansion, as well as other trading strategies

A number of the items on the road map concentrate on lessening the effect that bigger deals have on prices and expanding the range of execution choices available to traders. There is a significant reliance on limit orders, the time-weighted average price (TWAP) orders, and volume-weighted average price (VWAP) orders in TradFi; however, these types of orders are not yet generally accessible in DeFi.

In the first half of 2019, Hashflow will launch its first chain which is not an EVM and will continue to launch other chains in the second half of the year. Hashflow might be a method to swiftly and securely transfer assets across chains, especially considering the surge in L2 use and the energy behind the creation of multichain applications.

In addition, the launch of additional asset classes that go beyond spots will take place in the near future. Hashflow is able to accommodate more sophisticated assets, such as structured products, without raising the network's latency or the cost of gas due to the fact that computation (price) is done off-chain.

Risks associated with both centralization and transparency

The coding for Hashflow is not available to the public, and its smart contract addresses are not disclosed. The procedure has been successful during all three audits. As a result of an audit conducted by Certik, Hashflow's biggest risk vector was determined to be centralized. At the moment, the core team is in charge of managing a key contract that revolves around permission pools. The licenses include allowing new pools and market makers to operate and placing restrictions on those already in operation. The group is now hard at work on revising the contracts such that they incorporate an immutable and more restricted permissions contract.

Some bottom lines

Within the DEX ecosystem, traders and market makers now have access to a new and distinct alternative thanks to Hashflow's recent innovation. The one-of-a-kind solution contributes a hybrid version of the market maker model, which has the potential to improve execution for traders and alter the market structure for market makers. The next significant obstacle for Hashflow will be to increase its market share, either by attracting new users to the DEX or by stealing shares away from current DEXs.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Hashflow: A gem to watch for the upcoming bridge mania