Draft For Discussion Purposes OnlyEthfinex Liquidity TokenCreating the worlds most liquid exchange for digital assets.Built for the Ethereum community, using Ethereum.Ethfinex IncAugust 2, 2017Value PropositionA new token will act as a loyalty reward for token market makers onthe Ethfinex exchange. This will incentivise the creation of the most liq-uid exchange for trading tokens and tethered assets on Ethereum.The loyalty tokens are similar to loyalty points and are earned in pro-portion to users volume of trades as market makers.1Loyalty tokenswill entitle holders to claim rewards from fees generated by Ethfinex, andto participate in future exchange governance. Gradually, as more tokensare earned, the ownership of the exchange will become decentralised, andEthfinex will be owned by its customers. The loyalty token is referredfrom here onward as the Nectar token or NEC.Market Makers:Larger customers of the exchange adding liquidity to the market, actingas makers, will earn a stake in the future of the platform. This ensuresthey benefit from the value they create and have an incentive to continueto market make on Ethfinex. Accordingly they may also be able to havea large influence in future governance and development.Smaller Customers:Customers with lower trade volumes will benefit from the smaller spreadsand greater thickness of highly liquid markets, and have the opportunityto obtain loyalty tokens in the platform.Companies and Projects:A new generation of projects are building on Ethereum. Those projectsrequire exchange services between tokens, Ethereum, and traditional fiatmoney.These projects may interface with the Ethfinex liquidity pooleither by means of standard APIs or several decentralised exchange pro-tocols. In doing so they may earn loyalty tokens and become stakeholdersin the Ethfinex ecosystem, as well as be involved with its governance.1Makers are users that add liquidity to the market by posting bids and offers, as opposedto those that take liquidity by matching with these bids and offer.1Draft For Discussion Purposes OnlyContents1Introduction31.1Team and History. . . . . . . . . . . . . . . . . . . . . . . . . .42A New Vision: Ethfinex42.1Decentralised Exchange Challenges . . . . . . . . . . . . . . . . .52.2The Hybrid Blockchain Exchange Model . . . . . . . . . . . . . .53Nectar Token73.1Basic Functionality . . . . . . . . . . . . . . . . . . . . . . . . . .73.2Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83.3Legal Considerations . . . . . . . . . . . . . . . . . . . . . . . . .84Token Economic Model94.1Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94.1.1Fee Schedule. . . . . . . . . . . . . . . . . . . . . . . . .104.1.2Total Supply. . . . . . . . . . . . . . . . . . . . . . . . .104.2Token Redeem Mechanism . . . . . . . . . . . . . . . . . . . . . .114.3Market Price Dynamics. . . . . . . . . . . . . . . . . . . . . . .125Timeline and Journey126Get Involved132Draft For Discussion Purposes Only1IntroductionAfter the Bitfinex hack in 2016 2, when approximately US$72 million in bit-coin was stolen, the need to decentralise funds in the interests of security andcustomer protection was brought home to all reasonable observers. Significantlymore funds were stolen in the security breach than were in active use on theplatform at the time.After the security breach, a tradable tokenthe BFX tokenwas given,without release or waiver, but subject to conditions on tradeability, to victimsto address their losses. The tokens were subordinated, limited-recourse, andcontingent liabilities of Bitfinex. The tokens gave holders the opportunity toexchange them at face value for shares of the capital stock of iFinex Inc., toeventually be paid back out of future exchange operating profits at one hun-dred cents on the dollar, or to dispose of them in the market at current marketprices. Initially, these traded at a heavy discount, representing customer skep-ticism about whether they would ever be redeemed, given the history of othercryptocurrency exchange security breaches and the magnitude of the Bitfinexhack.When Bitfinex began fully redeeming the BFX tokens for USD and exchang-ing them for equity, confidence returned to the market, as reflected in the mar-ket price of the tokens. Trading volumes on the platform started returning toprevious levels. These positive market signals demonstrated the power of decen-tralising ownership to a community of interest through tokens. Many Bitfinexcustomers and supporters now have a stake in seeing Bitfinex succeed. Theytherefore have an additional incentive to trade on the platform. The benefitsfor any platform dependent on network effectsas are all exchanges that relyon liquidityare clear.Bitfinex has now spun offthe Ethfinex team. Ethfinexs vision is to createthe worlds most customer-centric and liquid digital asset exchange platform.Ethfinex will build on the decentralisation lessons of Bitfinex to create its ownliquidity incentive token on Ethereum, and will pioneer a hybrid decentralisedexchange model. This platform will not only be for or used by the Ethereumcommunity. It will be of the Ethereum community: creating, using, and con-tributing back smart contract code and tools.The Ethfinex team has the necessary industry expertise and existing de-velopment experience.Having learned the lessons of Bitfinex, we anticipatedelivering the first phase of Ethfinex in months not years. We are committed toensuring that the platform will have the most liquid market anywhere. Ethfinexalready has a successful trading engine and tools, and over four years of expe-rience in the digital token space. Like Bitfinex, Ethfinex will provide the mostuserfriendly experience in the marketplace.3Draft For Discussion Purposes Only1.1Team and HistoryEthfinex is being built by a team with a history of innovation in the publicblockchain space.Bitfinex (https:/bitfinex.com) was started in 2013. It is one of the mostadvanced digital token exchanges, and is the largest exchange by volume forBitcoin against the US Dollar. In addition to providing a suite of order types tohelp customers optimise their trading strategies, Bitfinex also provides a peer-to-peer financing market for financed trading. Bitfinexs strategy focuses onproviding unparalleled support and tools for professional traders.Tether ( https:/tether.to ) provides tokenised traditional currencies onblock-chain technology. Tether was originally built on the bitcoin blockchainusing Omni, but now also offers Ethereum-compatible tokens. Tether will pro-vide some of the key infrastructure for Ethfinex and decentralised exchangeprotocols.2A New Vision: EthfinexEthfinex will build a community hub for developers, traders, and enthusiasts.It will enable discussion, study, and trading in the Ethereum ecosystem. Tradi-tional centralised exchanges sit on a layer apart from blockchains, but Ethfinexwill reflect the nature of the Ethereum ecosystem itself, building smart con-tracts and decentralisation increasingly into everything it does. Our vision isto steadily move towards a completely decentralised platform, and to providetools and modules that will interact with and contribute to smart contract de-velopment and projects.The number of tokens and assets being tokenised on top of the Ethereumplatform is growing fast, and they are proving themselves to represent a dis-ruptive revolution to traditional business models. Alongside this growth is ademand to be able to be able to trade these tokens and contribute to newprojects. The core value of these tokens is the communities built around them.However, high quality information and discussion about these communities andtoken projects can be difficult to find. Ethfinexs vision is to create a community,resource, and information hub with a user reputation system, and simultane-ously provide the most advanced, highly liquid, and secure exchange tradingplatform available.There has been a flurry of new projects aiming to deliver decentralisedexchanges. In this context the primary use of the term decentralised usuallyrefers to a platform not requiring central custody of funds or the trust of a thirdparty in arbitrating trades and disputes. Ethfinex also subscribes to this vision4Draft For Discussion Purposes Onlyof the future. However, we recognize that there will be several intermediatesteps on the way to full decentralisation. We cannot do this alone, and Ethfinexwill contribute to and collaborate with other decentralised exchange protocols,e.g. 0xProtocol 1, as appropriate.To accelerate development of trustless exchange, Ethfinex will therefore pi-oneer a hybrid decentralised model for exchange. We aim to provide an ex-perimentation zone where decentralised exchange protocols can learn, test, andreceive feedback, and grow from Ethfinexs pool of liquidity.This approachgives Ethfinex the flexibility to be agnostic of technology and experiment withnew models of decentralised exchange as they emerge and integrate them intothe platform.2.1Decentralised Exchange ChallengesCurrent approaches to exchange settlement and order matching on blockchainhave several challenges to overcome: latency of on-chain orderbook prevention of front-running expense of on-chain transactions current scalability limitationsIn addition to these basic challenges, the speed and complexity requirementsof the most sophisticated trading customers mean that practical implementa-tion of fully decentralised matching and settlement on-chain still requires fur-ther development. Margin trading, involving a peer-to-peer financing marketon blockchain, is a further challenge that is as yet unsolved, but is essential toattaining large scale and liquidity.For some aspects of exchange platforms such as storing order books, it canbe unnecessary, inefficient, and expensive to use a blockchain, and it should notbe treated as one-size-fits-all solution. There are alternative ways to attain thebenefits of decentralisation such as additional security and resistance to DDoSattack. For example our team has developed a microservice architecture calledGrenache. This splits the platform into many microservices that use distributedhashtables for peer-to-peer service discovery. https:/github.com/bitfinexcom/grenache2.2The Hybrid Blockchain Exchange ModelThe Ethfinex Hybrid Exchange Model will implement blockchain solutions wherethey offer the best solutions, as and when these are scalable and mature. The5Draft For Discussion Purposes Onlyfirst major area where this is desirable and possible is for on-chain trade settle-ment without custody of funds.Figure 1 shows a simplified architecture of decentralised exchange protocolsand how they allow their users to trade with Ethfinex users.Ethfinex willprovide a generalised set of APIs and contracts through which other protocolscan interface with Ethfinex. As the field of on-chain exchange matures, Ethfinexwill be able to provide a zone for experimentation, allowing new protocols toaccess Ethfinex users large liquidity pool and trading opportunities. This willaccelerate the learning process for new decentralised exchange projects and leadto the development of optimal decentralized exchange tools and protocols.Figure 1: Simplified hybrid architecture overview. Blue arrows represent infor-mation only flows. Black arrows represent on-chain transactions sending funds.6Draft For Discussion Purposes Only1. Traditional users who value the high speed, financed trading capabilities,sophisticated features, and user experience of a centralised exchange con-tinue to use Ethfinex in the way that they currently use other centralisedexchanges, but will benefit from the additional liquidity provided by de-centralised users.2. The standardised set of APIs and contracts provide an interface whichthen allow any decentralised exchange protocol to trade with the Ethfinexorder book and with each other.3. The Nectar token is integrated into this abstraction layer, incentivisingon-chain liquidity providers who trade with Ethfinex by rewarding themwith loyalty tokens.4. Decentralised exchange users can trade with a large liquidity provider,without creating accounts at Ethfinex or trusting a third party with cus-tody of their funds. Ethfinex therefore leverages its liquidity to act asa market makers for these users, as well as for Ethereum-based projectswith requirements for on-chain exchange settlement.3Nectar TokenThe Nectar token (NEC) will be at the heart of the trading platform. It willbe compatible with the Ethereum ERC20 standard 4: this is required to linkthe Nectar token to any decentralised exchange protocols which interface withEthfinex, and therefore reward their users for the liquidity they add.The purpose of NEC is to reward market-making on Ethfinex. It is not toraise funds, or to fund or fuel crowdsales. Decentralizing an exchange means, inthe long term, decentralizing its ownership. Having a network of users that ownthe exchange will incentivize its owners to remain loyal users. This will benefitall users, as it will foster liquidity and keep the market efficient.3.1Basic FunctionalityThe primary purpose of the Nectar token is to reward market makers thus en-couraging them to provide thick order books and minimum spreads on everytrading pair.This will be achieved through the following mechanism:- Market makers trade throughout the month on the platform.- 50% of total trading fees paid by the maker and the taker are directed into asmart contract- At the end of the month the NECs are issued, and distributed to market mak-ers in proportion to the total trading volume they conducted as a maker duringthat month.7Draft For Discussion Purposes Only- A redeem mechanism will allow holders of the token to claim a reward at anytime, using up their tokens (i.e. a user who holds 5% of tokens issued would beentitled to claim up to 5% of the reward held in the contract)- If the market maker wishes, rather than redeem the tokens instantly they canthen choose either to hold their tokens longer term, or to sell them to anothermarket maker.The token generation event occurs every 28 days, and NECs are issued tothe market makers who traded during that period. This means that in the casewhere no redeeming of tokens occurs, the total supply always grows each month.Ethfinex itself has an initial supply of tokens which does not grow, and thereforeits percentage ownership falls over time as new tokens are created. Details ofthe implications of this model are explored later on under section 4.3.2GovernanceThe owners of the token will also be able to advise on governance of the to-ken and related aspects of the platform. This governance mechanism will beparticularly important in ensuring the details and implementation of the tokencan be refined after its launch. Defining the perfect liquidity incentivisationmechanism will be impossible without testing and feedback in real markets, andthe governance will complete the loop in allowing improvements to take place.Initially Ethfinex will retain the majority of the NECs, in order to be ableto refine the reward and issuance mechanism. However over time as more of theownership becomes decentralised to users, the governance model will allow largetoken holders, or coalitions of smaller token holders, to elect representatives whowill sit on an advisory board.Any individual or party owning 5% or greater of NECs will be entitled to aelect a board member.3.3Legal ConsiderationsNECs are part of a loyalty points scheme, where market makers receive tokensfor free, without release or waiver, in proportion to the volume of trades wherethey act as a market maker. These tokens can be redeemed for rewards fromthe Nectar token smart contract at a later date. NECs are not securities.The tokens can only be earned and held by members who have registeredwith the Ethfinex market maker loyalty scheme. Restricting token ownershipto members of the loyalty scheme will be achieved both offand on blockchain,through whitelisted Ethereum addresses or other means. All members are sub-ject to full verification by Ethfinex.Exchanging NECs will not be possibleexcept with other registered members of the Ethfinex loyalty scheme.U.S.Persons, as defined in Bitfinexs terms of service, may not be members of the8Draft For Discussion Purposes Onlyloyalty programme, may not receive NECs, and may not, therefore, trade in theEthfinex market for NECs. Any trade outside of the NEC market on Ethfinexis void.The tokens are not sold by Ethfinex. They are given for free as rewards tousers registered with the market maker reward scheme.4Token Economic ModelFurther details about the economic functionality of the token are explored, aswell as details of the operations and issuance.T0, initial number of tokens in existence (all owned by Ethfinex)T , total supply of tokensFT, total number of fees collected by the Liquidity Token smart contractVA, trading volume of a specific maker A over a month periodVT, total trading volume of all makers over a month periodN , total new tokens created each monthNA, new tokens earned by maker A4.1IssuanceThe issuance of newly earned tokens happens to users on 28 day cycles accord-ing to the following equations:N = 0.001VTT(T0+ FT)(1)NA= NVAVT(2)Equation 1 makes the number of tokens created each period, N, a functionof the total fees collected by the platform so far, FT. It also relates the tokensearned, NAto the total fees paid by the maker over the previous 28 day period,0.001VA. This design insures that at the time of issuance the value of the NECsissued (if redeemed instantly to retrieve associated fees) is always less than thefees paid by the maker. This prevents manipulation of the system where userscould earn tokens through high volumes of unprofitable trading in order to ex-tract the collected platform fees via the redeem mechanism.9Draft For Discussion Purposes Only4.1.1Fee ScheduleMaker: fees are paid at the point of execution when user adds liquidity to theorder book by placing a limit order under the ticker price for buy and above theticker price for sell.Taker: fees are paid when user removes liquidity from the order book by placingany order that is executed against an order of the order book.28 Day Trading Volume(ETH equivalent)Maker FeeTaker Fee0.00 or more traded0.10%0.20%1000.00 or more traded0.10% - NEC reward0.20%2000.00 or more traded0.10% - NEC reward0.20%5000.00 or more traded0.10% - NEC reward0.18%10000.00 or more traded0.10% - NEC reward0.16%100000.00 or more traded0.10% - NEC reward0.10%50% of all the fees collected from trading on Ethfinex are paid into the NECsmart contracts where they part of the reward scheme for Nectar token holders.N.B. the constant factor 0.001 applied in Equation 1 is to account for this 0.10%maker fee, and ensure the value of the rebate is proportional to fees paid whileacting as market maker.4.1.2Total SupplyBased on the issuance equations an example token supply growth chart is shownin Figure 2. This was modelled assuming constant monthly trading volume, VT,but varying this will lead to significantly different total issuance and profile. Itwas also based on an initial token supply, T0= 100,000 (see Equation 1).Due to total supply growth, market makers who wish to maintain their per-centage stake in the Ethfinex platform must continue to add liquidity to themarket to be rewarded with NEC each month.Ethfinexs percentage ownership of the loyalty points is also modelled inFigure 3 and will fall relative to the total as the supply increases.10Draft For Discussion Purposes OnlyFigure 2: Total supply growth over timeFigure 3: Ownership over time4.2Token Redeem MechanismThe redeem mechanism allows a token holder to destroy their tokens, reducingthe total supply, and in return claiming a reward from the Nectar token smart11Draft For Discussion Purposes Onlycontract which holds fees generated by the platform.Given an expectation of continued operations, the redeem mechanism wouldbe unlikely to be used, given that the price of NEC on a secondary market maybe a multiple of their underlying reward value.However in the case where Ethfinex were to stop operating, the redeemmechanism would become the mechanism for retrieving these funds from theNEC contracts.4.3Market Price DynamicsThe major concern for this model are the effects which secondary market pricewill play on the market maker incentivisation scheme. This is challenging tomodel given that it depends on the behaviour of the different entities in themarket.In the case where market value of NEC grows such that the value of tokensearned through each trade is greater than the maker fee paid, this could causeunintended consequences: for instance it could encourage market makers to of-fer unprofitable trades in illiquid markets to earn more tokens. On one handthis would be positive in narrowing spreads in those markets for other users(particularly if several market makers are competing to earn the NEC tokens),but could also lead to a form of price manipulation.These dynamics must be observed in practice, and it is likely the initial modelwill then need iteration. For this reason a governance process for adjustmentsto the token issuance equation, fee schedule, and other aspects of the platformwill be essential.5Timeline and JourneyStep 1: Initial Launch Building on Bitfinexs best in house trading platform to create an initiallymainly centralised exchange platform for ethereum-based tokens, includingfiat and btc tethers. Ensures high liquidity and transaction speed and scalability from the start. ICO and token community discussion platforms and investment hub. Grenache, in house protocol built by Bitfinex will mean decentralised mi-croservice architecture. Nectar token creation, initially mainly owned by Ethfinex but increasinglydecentralised ownership, with rewards held in token smart contract.12Draft For Discussion Purposes Only Integration of several projects in the Ethereum ecosystem (i.e. EthereumName Service integration)3Step 2: Hybrid Decentralised Exchange Increasing addition of new api and smart contract tools focused towardsprojects in the Ethereum ecosystem, and provide oracle functionality forsmart contracts: for example providing modules for Melonport. Funds have the option of being held decentralised in users own Ethereumwallets until point of execution of trades. Planned further integration with other potential partners in the Ethereumecosystem. There are several planned partnerships in motion, includingEthereum-based fiat tokens with Tether.to , and these will be announcedwhen the integration details are fixed. Integration of 0x protocol and several other decentralised exchange pro-tocols, to allow them to interface and trade with Ethfinex users liquidity. Nectar token governance advisory board set up as customer ownershipincreases.Step 3: Evolution As Ethereum matures and becomes more scalable, with proof of stake,sharding and raiden all in the pipeline, and as other technologies emerge,the platform will transition to full decentralisation of funds, with no re-quirements for funds to be in the custody of Ethfinex. Ethfinex via the Nectar token will become the community owned hub fortoken trading in the Ethereum ecosystem, with the highest liquidity, mostadvanced trading tools, and offering the best user experience.6Get InvolvedThe Nectar token implementation details in this paper are still subject to furtherchange as we execute on our vision. Feedback, reviews, and improvements aretherefore extremely welcome, and can be directed to whitepaperethfinex.comor submitted for community review in the /r/ethfinex reddit channel.If you might be a potential partner please get in contact at partnersethfinex.comto discuss how we could work together.We are a fast-moving, dynamic team, and are actively looking for talentedindividuals to join us. Please email careersethfinex to apply if you are as pas-sionate about Ethereum based tokens and the communities around them as weare.13Draft For Discussion Purposes OnlyReferences1 0xProject. An open protocol for decentralised exchange on the blockchain,https:/0xproject.com/pdfs/0x white paper.pdf.2 Bitfinex 2016 Security Breach. https:/en.wikipedia.org/wiki/bitfinex hack.3 Ethereum Name Service. https:/ens.domains.4 ERC20 Token Standard. https:/theethereum.wiki/w/index.php/erc20 token standard.14