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In the Wake of FTX, Deepwaters Claims its Hybrid Exchange Is the Best of Both the CEX and DEX Worlds

There are two types of cryptocurrency exchanges in the cryptocurrency world: centralized exchanges (CEX) and decentralized exchanges (DEX). Both models have their pros and cons, and while at World Economic Forum 2023 in Davos, Switzerland, Blockchain Journal editor-in-chief David Berlind caught up with Dylan Peters and Michael Callahan, the Chief Business Development Officer and Vice President of Marketing at Deepwaters, an exchange that is neither fish nor foul. Deepwaters has some of the operational features of a centralized exchange but, unlike most CEXes (and more in DEX-like fashion), never takes control of traders' currencies (fiat or crypto). This hybrid model, according to Peters and Callahan, offers crypto traders the best of both worlds.

(Full-text transcript appears below.)

World Economic Forum

Centralized Exchange (CEX)

Decentralized Exchange (DEX)

Decentralized Finance (DeFi)

By David Berlind

Published:January 18, 2023

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7 min read

In this Story

Audio-Only Podcast



How Could a Hybrid Cryptocurrency Exchange Protect Investors From An FTX-like Collapse?

David Berlind: I'm David Berlind, editor-in-chief with Blockchain Journal. I'm here in Davos, Switzerland for World Economic Forum. I'm roaming around the city up and down the promenade that leads to the Congress Center where World Economic Forum is taking place, looking for great stories to tell. And I think I found one of them. Two entrepreneurs, one from Columbia, the other from San Francisco, I think they're buddies and they're on the verge of building something that they say solves the big problem of FTX, the one that FTX caused. So I'm going to ask you guys to first identify yourselves, and then I'll ask you a little bit about what your story is, so who are you?

Dylan Peters: My name is Dylan Peters.

Berlind: And what do you do?

Peters: Co-founder and CBDO of Deepwaters.

Berlind: Okay. Deepwaters, that's what we'll be talking about?

Peters: That's what we're talking about.

Berlind: Deepwaters. Okay. And you are?

Michael Callahan: I'm Michael Callahan, Vice President of Marketing at Deepwaters.

Berlind: And how many people are at Deepwaters, or is it just the two of you?

Peters: No, we're a team of 16 full-time that have been building over the past 18 months.

Berlind: Okay, so you've been building for—we just lost the lights, but we'll keep going, right? You've been building for 18 months, so while you were building this, FTX imploded, right? And then you guys were like, "BINGO! Here we are." But for our audience, what does Deep Waters do? What's your unique value proposition?

Peters: We are the world's first transparent and provably trustworthy exchange that is building a level playing field for all investors, whether they're retail, institutional, or algorithmic traders.

Berlind: So, for the people in our audience who don't even know what an exchange is, let's start there. What's an exchange?

Callahan: I can start with this. So an exchange is a platform that you go on to online where you can transition one type of currency or asset, for instance, US dollars or Bitcoin or anything else, ETFs into another. So Cryptocurrency exchanges like Kraken or FTX, obviously, or EXG were crypto-specific exchanges. And we, at a very high level, our exchange can be described in three principles. One, we have a completely new, unique technology where it makes it impossible for us as the exchange to engage in the kind of fraud, corruption, and manipulation of trading and assets that FTX, Voyager, Celsius, and some of these other projects did, Three Arrows Capital, we couldn't do that if we tried.

The second principle is anybody outside or inside our exchange can come in and see exactly how our trade flow is executed, what our trade rules are, and how our assets are managed. So you don't need to trust us, and this is my favorite thing to say when we get interviewed: if you know anything about crypto right now and you hear that someone's starting an exchange, you should be really dubious about anything they tell you. You should assume that I'm a liar. You should assume everything I say is exaggerated. I'm not telling you the full truth, and we want that.

Berlind: Well, the minute I met you, I thought you were a liar. He just seemed kind of like a shady kind of guy.

Callahan: That's the right reaction.

Berlind: Yeah. Thank you. But...

Peters: He said he was in marketing, right?

Berlind: Oh, oh, he said he was in marketing. Yeah. All marketers are liars, of course. So now in this big debate about exchanges, there's two types of exchanges. There's a centralized exchange or a CEX and a decentralized exchange, DEX. So for the benefit of our audience, what's the difference? What are these and what are the key differences? Who wants to answer that part?

Callahan: I can answer that. So, a centralized exchange is one that is managed by one centralized party. All exchange, all the assets are executed, all the trades are executed by that one centralized party and not on an independent external blockchain. So examples of this might be, again, Kraken or...

Berlind: Binance?

Callahan: Binance, of course. Whereas a decentralized exchange is something like Uniswap, where all trades are managed independently of that exchange on the Blockchain. So Uniswap cannot turn off trading, they cannot choose what to do with your trades, they cannot rehypothecate or move the trade flow around.

Berlind: Uniswap is essentially a living, breathing organism that nobody can mess with right now. So in the world of trust, because you're saying, "don't trust us."...

Callahan: Exactly, right.

Berlind: But you're also saying, "Wait a minute, we're launching this thing that's more trustworthy than anything else." Usually...

World Economic Forum attendee: Sorry, sorry, sorry, sorry.

Berlind: Usually the, well, pardon all the activity around here.

Peters: Interactive interview.

Berlind: Yeah.

Callahan: Yes.

Berlind: Usually, a lot of people will say that a centralized exchange is where the risk is because one party controls it, but the decentralized exchanges are the ones that nobody controls, therefore, you can trust it more because no central party's going to do something bad.

Callahan: And you can see how trades are executed many cases on a decentralized exchange.

Berlind: Wait, now you're saying you've got what the best of both worlds?

Peters: Yes.

Callahan: That's right.

Berlind: Like, how so?

Callahan: We are, in fact, a centralized exchange, but we, as a company, are not matching trades and executing them. We use a technology called Confidential Computing, or you may heard of Trusted Execution Environments. This is actually a pretty mature technology in your phone that does biometrics, which scans your face or your fingerprints. What this allows us to do is all trades are executed off the blockchain, but we can't see them. No one can see them. We can't manipulate that trade flow, our partners can't individuals can't. But we use a tool called Remote Attestation, so anybody, you don't need privilege, you don't need coding knowledge, can come in and see exactly how those trades are executed and how assets are managed. So you don't need to trust us. We execute like a centralized exchange, but we use a different mechanism to achieve the trustlessness of a decentralized exchange.

Peters: Building on that, we also utilize decentralized on-chain technology, so self-custody, so there can't be any rehypothecation of billions of dollars. And then we also utilize on-chain real-time validation, so after that order has been executed, you can prove and see for yourself that there was no interruption or disruption of the trade flow, which is why we are a hybrid exchange that utilizes both.

Berlind: So you guys are using transparency to drive trust and hoping that some people will recognize that and come to you as opposed to another exchange.

Peters: What we're doing is creating this transparent and provably trustworthy environment. It becomes a no-brainer because all traders need us for different reasons. The algorithmic traders will come to us because their back-tested strategies will survive market exposure. Retail traders will come to us because of our messaging, and they're sick and tired of what's happened with all these other Robinhoods turning off the buy button and numerous other bad actors in our space.

Callahan: FTX.

Peters: FTX. Institutions will utilize us as a kind of demilitarized zone where they can come. As opposed to when they need to exit a position, they can lean on us instead of their peers and competitors. So we are essentially the best of all worlds for these trades.

Berlind: Okay. So, 18 months in, right? 16 people. You're here at the World Economic Forum. What are you hoping to accomplish here?

Callahan: Well, we are going to be launching in just under a month, so we're going to be announcing the date in the coming days. Be ready for that. We do want to have a huge, say, a huge thank you to our community so far. We came out publicly with our testnet about four months ago, and in the last four months, we've grown effectively from zero to over 140,000 people on our testnet without spending a single dollar. So, the reception that we've gotten from this community has been incredible. There are so many people enthusiastic about true transparency. Again, we can't be FTX, Voyager, Celsius, or Three Arrows if we want to. And that's what the community has been so incredibly receptive and positive about. And to all of those who have been members and supporters, a true thank you to you all.

Berlind: Okay. Well, guys, thanks very much. I want to wish you luck. It's really fun to bump into some young entrepreneurs like yourselves here at World Economic Forum. I thought I was going to bump into all people from a completely different generation. But here we are, we've got a bunch of youngins here.

Peters: And we've got some gray hairs on the team, too.

Berlind: You got some gray hairs. I hope they see this video because I don't know if they're going to appreciate it.

Callahan: FTX gave me all this.

Berlind: Oh yeah. You're getting a little gray up there, too. So am I. All right.

Callahan: We've earned it.

Berlind: We have earned our stripes. Thanks very much, guys. It was nice to meet you.

Peters: Pleasure's all ours.

Berlind: Good luck.

Callahan: And to you, sir.

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