Ethfinex Trustless launches OTC exchange

The Ethfinex Trustless OTC exchange relies on a system of ‘blockchain enforced’ smart contracts. These are similar to atomic swaps in that they allow traders to make exchanges while keeping the assets in their own wallets, instead of surrendering them to a custodial escrow service.

Ethfinex is trustless

Though peer-to-peer platforms are considered more decentralized than ordinary exchanges, the OTC process still involves risk — with traders needing to trust that the other party will fulfill their obligations and exchange the assets. To enforce this, platforms typically rely on escrow agents that take hold of the assets of both trading partners, and only release them to the rightful owners once the transaction has been verified.

While the escrow process protects traders from untrustworthy buyers or sellers, it introduces third-party risk. By replacing the escrow with smart contracts, the Ethfinex Trustless OTC service promises to deliver reduced fees and higher security for traders.

Decentralizing OTC trading

The ‘blockchain enforced smart contracts’ that carry out trades on the OTC platform are similar to cross-chain atomic swaps, which are widely used in decentralized exchange protocols to facilitate trades.

Despite the difference in underlying mechanics, the user experience of the trade remains similar to existing escrow-based services. Buyers and sellers wanting to conduct a transaction can initiate a trade by generating a URL that links to the Ethfinex Trustless platform, which is then sent to their trading partner to complete the transaction.

Another advantage is that traders pay low fees of 0.02 percent, and are not subject to rules defining minimum or maximum order sizes. These features could open up OTC trading to smaller players, instead of the family offices, institutions, and hedge funds that dominate the market:

"Extending the capabilities of Ethfinex Trustless to include an OTC service is an important step in fulfilling the potential of decentralization in the cryptocurrency market," said Ethfinex Trustless founder Will Harborne. "It opens the doors to those unable to use expensive OTC desks, and provides security in blockchain enforced atomic deals. Customers no longer have to place trust in a third party, or take the risk of trades directly with the counterparty themselves."

But with no third party overlooking each trade, the platform could also be attractive to less well-intentioned users. And though traders based in the United States and other restricted jurisdictions are prohibited from using the service, there is no sign-up and no KYC procedure.

Hybrid OTC platforms

While Ethfinex Trustless is the first big decentralized exchange to launch an OTC offshoot, several less well-known platforms have already launched their own — with varying degrees of decentralization.

Ethereum-based DEX Airswap launched its own token-focused OTC platform Spaces late last year, which uses a searchable bulletin board to allow traders to publicly announce their intentions, and then initiate the exchange directly using a smart contract when a suitable partner is found.

On the more centralized end of the spectrum is the OTC trading desk of non-custodial exchange Hodl Hodl, which explicitly does not hold customers’ funds. Built on the bitcoin blockchain, this OTC service uses multi-sig escrow to let people safely buy bitcoin or litecoin with cash, and like Ethfinex’s offering, advertises itself as a "non-KYC/AML exchange."

Well-established peer-to-peer trading platform LocalBitcoins is taking a different approach and has quietly removed the option for transactions to be completed with cash in person. The platform said in February that it would work towards compliance with new EU Anti-Money Laundering regulations.