Next-generation exchange? Avalanche founder proposes FEX concept: Fully encrypted on-chain order book

Given the internal management issues of several centralized institutions in 2022, which have triggered a widespread domino effect throughout the cryptocurrency industry, causing investors to lose confidence in major infrastructure. In order to address security concerns, Avalanche co-founder Kevin Sekniqi recently proposed a new type of exchange called FEX, aiming to bring fairness and security that traditional exchanges have failed to achieve.

Features of the Next-Generation Exchange FEX

This new generation exchange has the following three main features:

1. It allows anyone to remotely inspect the exchange's code, meaning that everyone can verify if the exchange has backdoors or privileges for specific individuals. This also prevents the exchange from making modifications to the code privately.

2. All trade requests are presented in ciphertexts, which means they are fully encrypted. In this scenario, no one can front-run trades, and trade records are only made public after execution to ensure market fairness.

3. In the event of a hack on the exchange system, the exchange's guarantee mechanism will not completely collapse but will execute trust assumptions similar to those of centralized exchanges.

Kevin Sekniqi believes that by achieving the above functions, it is possible to create an exchange that guarantees order book integrity while also ensuring confidentiality and stability. Sekniqi refers to this type of exchange as FEX Fully Encrypted Exchange, which is a fully encrypted exchange.

Classification of Exchange Types into Four Quadrants

After clarifying the concept of FEX, Kevin Sekniqi distinguishes current exchange types into four quadrants, where the upper quadrants represent better solvency and less vulnerability to fund theft, while the right side ensures correct trade execution without front-running.

In the quadrant chart, the standard FEX is located in the top right corner, offering the best security and fairness. Regulated centralized exchanges have weaker solvency and fund theft prevention capabilities, while decentralized exchanges struggle to avoid front-running and ensure correct trade execution.

Current Execution Issues with FEX

Although in theory FEX can solve many of the issues exchanges face, Kevin Sekniqi notes that building a FEX requires reliance on the technology of Secure Enclave secure isolation processors.

Simply put, in the latest chips found in high-end computers, there is a special hardware that effectively acts as an encrypted black box CPU within the main CPU. With technological advancements, Secure Enclave is gradually transitioning from experimental to practical stages. Only when the hardware quality is sufficiently refined can the development of the next-generation exchange FEX begin.