Trading is the heartbeat of the entire crypto world, and the DEX sector always welcomes new players to meet the trading demand. On August 8, the ZK-powered DEX Vessel Finance announced it has secured $10 million in funding. The investment round was backed by Sequoia Capital, Scroll co-founders Sandy Peng and Ye Zhang, the Avalanche Foundation, the Algorand Foundation, IMO Ventures, Folius Ventures, Incuba Alpha, and a group of angel investors.

According to data from DefiLlama, the DEX sector is highly crowded, with over 1,000 DEXs of various sizes, and more than 20 of them have a TVL exceeding $100 million. In such a competitive environment, how does Vessel Finance plan to stand out? ZK technology is often used in infrastructure projects; what improvements does it bring when applied to a DEX?

Why do we need a new DEX?

In a market already filled with numerous DEXs, why is there a need for a new trading platform like Vessel? To address this question, we need to examine the current state and limitations of the DEX ecosystem.

1. Limitations of Existing DEXs:
   Most existing DEXs are built on mainstream blockchains like Ethereum, which limits their processing capacity. Although Layer 2 solutions have greatly improved transaction speeds, some Layer 2 solutions may still face scalability issues as user numbers and transaction volumes increase.

2. Cost and Scalability Issues:
   Layer 2 solutions have indeed reduced gas fees, but challenges persist. The decentralization in Layer 2 can lead to fragmented liquidity and user bases. Cross-chain interactions may still incur high costs and waiting times, and varying user experiences across different Layer 2 solutions add to the complexity.

3. Fragmented Liquidity:
   Liquidity is dispersed not only across different DEX platforms but also across various Layer 2 networks. This fragmentation can lead to significant slippage, affecting trading efficiency and prices, particularly for large transactions.

4. Poor User Experience:
   Compared to centralized exchanges, many DEXs have complex interfaces and cumbersome processes. Users without a technical background may find DEXs more challenging to use.
   In response to these ongoing challenges, Vessel aims to address the issues faced by current DEXs (including those on Layer 2) and offer a more comprehensive and efficient solution for the DeFi ecosystem. Vessel seeks to combine the advantages of both centralized exchanges (CEXs) and decentralized exchanges (DEXs), providing a more streamlined and effective platform.

In terms of approach, Vessel’s overall plan is to:

1. Build a Unified Layer 3 Platform: Vessel aims to integrate the advantages of different Layer 2 solutions to provide a one-stop trading environment for users.
2. Reduce Transaction Costs Using Layer 3 and ZK Technology: By leveraging Layer 3 and Zero-Knowledge (ZK) technology, Vessel intends to lower transaction costs to levels lower than current Layer 2 solutions.
3. Enhance Scalability and Liquidity Aggregation: Vessel will aggregate liquidity from multiple sources to offer better price discovery and reduced slippage.
4. Incorporate the Usability of CEXs: Vessel seeks to provide a unified and intuitive user interface, drawing from the ease of use found in centralized exchanges (CEXs).

Vessel Finance’s core workflow

From a technical perspective, the Vessel protocol can be seen as a state machine, consisting of user states (such as accounts, orders, balances) and system states (such as timestamps, price oracles).

Whenever a user submits a request, the system performs a series of operations to update specific elements of the current state.

To understand this better, think of Vessel as a bank vault system. Each transaction is akin to the bank vault system performing a state update, which includes changes in user balances, order statuses, and even slight market price fluctuations.

In traditional blockchain systems, each of these small updates must be recorded on-chain, leading to high gas fees and slower processing speeds. However, in Vessel, these state updates are efficiently handled off-chain, and then verified on-chain through Zero-Knowledge (ZK) proofs.

For example, if the system processes 10,000 similar transactions within 5 minutes, Vessel will generate a ZK proof at the end of this period. This proof can demonstrate that “within these 5 minutes, 10,000 transactions occurred, all of which are valid, and the system’s final state is accurate.” This proof can be quickly verified on-chain, significantly improving the efficiency and scalability of the entire system.

Specifically, Vessel’s workflow involves three main components: Sequencer, Prover, and Smart Contract. These components work together step-by-step to accomplish the above tasks.

Step 1: Sequencer

When a user submits a transaction request, it is first handled by the Sequencer. The Sequencer is a transaction execution engine that processes requests instantly, similar to servers in centralized exchanges. It also generates an execution trail for the Prover to create SNARK proofs. For example, when a user submits a transaction request (such as buying 100 tokens), the Sequencer immediately processes the request. It records detailed information about the transaction, including its position in the queue and submission time. These detailed records form the “execution trail.”

Step 2: Prover

The Prover is responsible for generating proofs for state machine operations. It runs Zero-Knowledge Proof (ZKP) protocols to create proofs based on the Sequencer’s execution trail. This process ensures that all operations follow specific rules, preventing unauthorized creation or transfer of funds. In the Vessel system, the Prover checks all transactions processed by the Sequencer. For example, it verifies that User A has sufficient balance to purchase 100 tokens, the transaction price matches the current market price, and so on. Then, it generates a mathematical proof to show that “yes, these transactions are correct and there have been no violations.”

Step 3: Smart Contract

The smart contract includes a verifier and a custodian. Once the Prover generates a SNARK proof, it is forwarded to the smart contract. The verifier checks the proof to confirm the validity of the state changes. The custodian holds user assets and only allows asset movement when valid proof is received. This mechanism ensures that all transactions are authorized and secure. For example, if the proof shows that User A has successfully purchased 100 tokens, the smart contract will deduct the corresponding amount from User A’s account and add 100 tokens to their balance.

The combination of ZK with VAELOB, order book and AMM

Zero-Knowledge Proof (ZKP) technology plays a central role in Vessel’s workflow:

By using streamlined ZKP, Vessel transforms complex computational processes into proofs that can be easily verified. This allows the system to batch process user requests, perform state changes off-chain, and then generate proofs to confirm correctness. This significantly enhances transaction processing efficiency and scalability.

ZKP technology ensures that each transaction is valid without revealing the specific details of the transaction. This not only protects user privacy but also maintains the overall security of the system. As Vessel’s slogan puts it: “Don’t Trust, Verify.”

Vessel’s ZK system also supports cross-chain operations, making asset transfers and transactions between different blockchain networks more secure and efficient.

Additionally, another notable innovation by Vessel is its verifiable AMM-Embedded Limit Order Book.

This is the core technology of the Vessel platform, which cleverly combines the advantages of traditional order books and Automated Market Makers (AMM), while ensuring the entire trading process is verifiable. Here’s a more straightforward explanation:

A traditional centralized exchange (CEX) is like a bustling stock trading floor where many traders shout out the prices and quantities they want to buy or sell. This is the order book model—intuitive and efficient but requiring a high level of trust in the centralized institution.

On the other hand, a decentralized exchange (DEX) is more like an automated vending machine. You put in one type of token, and the machine automatically calculates and gives you another type of token based on a preset formula. This is the AMM model—decentralized and transparent, but potentially less efficient and more susceptible to price slippage.

VAELOB is like bringing that vending machine (AMM) into the trading floor (order book) and giving everyone a special pair of glasses to view and verify how the machine operates in real-time.

Specifically:

• It retains the intuitiveness and efficiency of the traditional order book model.
• It integrates the liquidity and automation features of AMMs.
• It ensures the entire process is verifiable through zero-knowledge proof technology.

Let us understand through a simple example:

Suppose Alice wants to buy 1 ETH and the current market price is $3810.

a) In a traditional order book, the system searches for the sell orders closest to the specified price.

b) In VAELOB, the system not only matches user orders but also utilizes liquidity from AMM pools. For example:

0.7 ETH might come from a sell order at $3800 (including 0.4 ETH from the AMM pool and 0.3 ETH from other users), and the remaining 0.3 ETH might come from a sell order at $3801 from the AMM pool.

c) When AMM pool orders are matched, new orders are automatically placed at adjacent price points to maintain market liquidity.

The benefits of this approach are:

a) Capital efficiency: Liquidity providers can choose specific price ranges to provide liquidity, similar to Uniswap V3 but with greater flexibility.

b) Better price discovery: Combines the immediacy of the order book with the continuous liquidity of AMMs.

c) Reduced slippage: Minimizes the price impact of large trades through precise price points and range management.

d) Transparent and verifiable: All operations can be verified through zero-knowledge proofs, enhancing security and trust.

e) User-friendly: Traders can place orders as they would on a traditional exchange while benefiting from the decentralized advantages of a DEX.

Roadmap and Participation Space

Currently, Vessel is still in the closed alpha testing phase, but its official Twitter has announced that the mainnet is coming soon. Given the significant funding, getting involved in the testnet early might be a good choice. Users can join the testnet waiting list here and will need an invitation code to participate in the testnet interactions.

Once an invitation code is obtained and logged into the product interface, users can perform various operations such as setting up a wallet, switching networks, depositing funds, making transactions, and withdrawing, with the process being similar to most other DEXs.

The roadmap indicates that the project’s mainnet will launch in the third quarter, and it will also develop various features such as perpetual DEX, liquidity aggregation, and decentralized order matching.

As the DEX space becomes increasingly competitive, factors such as sufficient incentives, low trading costs, a wide range of trading pairs, and security will be crucial for a project to stand out. The performance of Vessel remains to be seen.

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