//Nidus: Risk Control Blockchain designed for speed, transparency and reliability

Nidus: Risk Control Blockchain designed for speed, transparency and reliability

When designing Sparrow, we studied a variety of decentralized exchange implementations: on-chain order books, automated market makers, state channels, and hybrid off-chain order books. We frequently asked ourselves: Who do we ultimately serve? What are their concerns? What tradeoffs make the most sense for our users? How do we help them control their risk and bring confidence to a very young market?After collecting feedback we learned that our users want options to be matched quickly, and once executed, their digital assets should be handled transparently and transferred reliably during settlement. We concluded that speed would be the most critical issue, followed closely by transparency and reliability.We decided to base Sparrow on a hybrid off-chain approach coupled with a Proof-of-Authority (PoA) consensus algorithm built on Ethereum smart contracts, as this implementation would fundamentally provide the fastest transaction speeds for the users in the network and provide transparent and reliable handling of their digital assets. We aim to efficiently match orders at scale and quickly validate peer-to-peer transactions on the network.Protocol DesignSparrow is a secure token exchange based on smart contracts for peer-to-peer options trading. The protocol includes an (off-chain) order matching framework to provide optimal execution instances, coupled with a proprietary options pricing engine. Decentralized exchanges implemented with Ethereum smart contracts have mostly failed to generate significant volume due to inefficiencies in their design that impose high friction costs on market makers. In particular, these implementations place their order books on the blockchain, requiring market makers to spend gas each time they post, modify or cancel an order. In addition, maintaining an on-chain order book results in transactions that consume network bandwidth and bloat the blockchain without necessarily resulting in value transfer.Nidus — The Ethereum Chain for Sparrow OptionsDue to the nature of risk control and the needs of our users, Sparrow Exchange needs to be able to match orders quickly, even during periods when the Ethereum mainnet is extremely busy and manage settlement transparently and reliably. Sparrow Options will be implemented using Ethereum smart contracts and deployed onto an Ethereum Chain called Nidus. Nidus will be used exclusively for the deployment of Sparrow Options to maximize performance specific to the needs of our users — speed, transparency and reliability.Nidus is a straight deployment of Ethereum chain on Parity node with minor modifications. This provides a guarantee that EVM of Nidus is exactly the same as that of Ethereum mainnet. While Nidus is Sparrow’s deployment of an Ethereum blockchain, nodes are able to freely connect to Nidus to verify its authority and authenticity, providing transparency to our settlement layer.Nidus is a Proof of Authority (PoA) Ethereum blockchain.Installable instances of Nidus are available as an open source client on our GitHub account.http://bit.ly/2ZtjbFu stats of our testnet can be viewed at the following:http://bit.ly/2XiBUGm TransactionsNidus will have a short block time to allow for rapid processing on the settlement of smart contracts. This ensures speedy transactions even when other blockchains such as the Ethereum mainnet or Bitcoin network may be experiencing high traffic, allowing our customers to hedge against rapid price movements.Orders are matched off-chain with automated market-making workflows orchestrated on Sparrow’s proprietary matching engine. This allows for flexible order-matching computations. The engine matches orders based on the parameters defined by the user and triggers machine-learning models to offer optimal prices for the contract. It also supports partially matches orders (when only a part of an order can be matched due to limited liquidity).Once matched, the order gets published onto Nidus (a task within the matching service’s workflow) as a transaction in the form of a Smart Contract. Authoritative nodes then validate this transaction and secure it to the block as an immutable record. Each node within the network holds and maintains the latest copy of the ledger (replication and fault-tolerance). Smart contracts ensure that authors are verifiable, specifies control of the assets in exchange and authenticates all behaviour related to the functions defined in the document. Non-authoritative nodes are free to connect to Nidus to independently observe, validate and obtain a copy of the blockchain.Maximum TransparencyThrough Nidus, all deposits into Sparrow are published as SRC20 tokens, providing maximum transparency on the digital assets in our custody.Pricing data would be published onto smart contracts on Nidus periodically. The data is published independently by Sparrow’s engine without knowledge on the options trading layer.Options trading contracts are then settled fully on smart contracts published on Nidus based on the pricing data smart contracts. All settlement are done transparently on smart contracts, including but not limited to settling of options contract between the two parties, but also settlement of trading fees.website: http://bit.ly/2R4XHMt

When designing Sparrow, we studied a variety of decentralized exchange implementations: on-chain order books, automated market makers, state channels, and hybrid off-chain order books. We frequently asked ourselves: Who do we ultimately serve? What are their concerns? What tradeoffs make the most sense for our users? How do we help them control their risk and bring confidence to a very young market?

After collecting feedback we learned that our users want options to be matched quickly, and once executed, their digital assets should be handled transparently and transferred reliably during settlement. We concluded that speed would be the most critical issue, followed closely by transparency and reliability.

We decided to base Sparrow on a hybrid off-chain approach coupled with a Proof-of-Authority (PoA) consensus algorithm built on Ethereum smart contracts, as this implementation would fundamentally provide the fastest transaction speeds for the users in the network and provide transparent and reliable handling of their digital assets. We aim to efficiently match orders at scale and quickly validate peer-to-peer transactions on the network.

Protocol Design

Sparrow is a secure token exchange based on smart contracts for peer-to-peer options trading. The protocol includes an (off-chain) order matching framework to provide optimal execution instances, coupled with a proprietary options pricing engine. Decentralized exchanges implemented with Ethereum smart contracts have mostly failed to generate significant volume due to inefficiencies in their design that impose high friction costs on market makers. In particular, these implementations place their order books on the blockchain, requiring market makers to spend gas each time they post, modify or cancel an order. In addition, maintaining an on-chain order book results in transactions that consume network bandwidth and bloat the blockchain without necessarily resulting in value transfer.

Nidus — The Ethereum Chain for Sparrow Options

Due to the nature of risk control and the needs of our users, Sparrow Exchange needs to be able to match orders quickly, even during periods when the Ethereum mainnet is extremely busy and manage settlement transparently and reliably. Sparrow Options will be implemented using Ethereum smart contracts and deployed onto an Ethereum Chain called Nidus. Nidus will be used exclusively for the deployment of Sparrow Options to maximize performance specific to the needs of our users — speed, transparency and reliability.

Nidus is a straight deployment of Ethereum chain on Parity node with minor modifications. This provides a guarantee that EVM of Nidus is exactly the same as that of Ethereum mainnet. While Nidus is Sparrow’s deployment of an Ethereum blockchain, nodes are able to freely connect to Nidus to verify its authority and authenticity, providing transparency to our settlement layer.

Nidus is a Proof of Authority (PoA) Ethereum blockchain.

Installable instances of Nidus are available as an open source client on our GitHub account.

https://github.com/sparrowex/nidus-docker

The stats of our testnet can be viewed at the following:

https://testnet-stats.sparrowexchange.com/

Fast Transactions

Nidus will have a short block time to allow for rapid processing on the settlement of smart contracts. This ensures speedy transactions even when other blockchains such as the Ethereum mainnet or Bitcoin network may be experiencing high traffic, allowing our customers to hedge against rapid price movements.

Orders are matched off-chain with automated market-making workflows orchestrated on Sparrow’s proprietary matching engine. This allows for flexible order-matching computations. The engine matches orders based on the parameters defined by the user and triggers machine-learning models to offer optimal prices for the contract. It also supports partially matches orders (when only a part of an order can be matched due to limited liquidity).

Once matched, the order gets published onto Nidus (a task within the matching service’s workflow) as a transaction in the form of a Smart Contract. Authoritative nodes then validate this transaction and secure it to the block as an immutable record. Each node within the network holds and maintains the latest copy of the ledger (replication and fault-tolerance). Smart contracts ensure that authors are verifiable, specifies control of the assets in exchange and authenticates all behaviour related to the functions defined in the document. Non-authoritative nodes are free to connect to Nidus to independently observe, validate and obtain a copy of the blockchain.

Maximum Transparency

Through Nidus, all deposits into Sparrow are published as SRC20 tokens, providing maximum transparency on the digital assets in our custody.

Pricing data would be published onto smart contracts on Nidus periodically. The data is published independently by Sparrow’s engine without knowledge on the options trading layer.

Options trading contracts are then settled fully on smart contracts published on Nidus based on the pricing data smart contracts. All settlement are done transparently on smart contracts, including but not limited to settling of options contract between the two parties, but also settlement of trading fees.

website: https://sparrowexchange.com/