Mintlayer built-in DEX feature

Mintlayer's Decentralized Exchange (DEX) is a feature of its ecosystem that allows users to trade tokens without relying on centralized intermediaries. Unlike traditional exchanges that require users to deposit funds and relinquish control, Mintlayer's DEX allows for non-custodial trading. This means that users maintain full control over their assets during the trading process, enhancing security and privacy.

Mintlayer's DEX mechanism is based on atomic swaps. Atomic swaps support peer-to-peer cross-chain transactions, allowing users to exchange assets between different blockchains (such as Bitcoin and Mintlayer tokens) without the need for third-party custody or bridging. This feature directly integrates native Bitcoin into the Mintlayer ecosystem without the common wrapped tokens found on other decentralized platforms, reducing the risks associated with third-party custody.

One advantage of this DEX model is that it significantly reduces the cost and complexity of trading. Users only need to pay network fees, without having to pay the transaction fees or withdrawal fees typically charged by centralized exchanges. This simplified system not only improves user experience, but also reduces the common security vulnerabilities found in centralized platforms.

Mintlayer lacks smart contract functionality, while smart contracts are crucial for implementing automated market makers (AMMs) like Uniswap V2, in which liquidity pools are automatically managed by smart contracts. Instead, Mintlayer relies on atomic swaps and hash time lock contracts (HTLC), making it more suitable for order book-based models rather than AMMs.

In this system, users manually set and match orders based on price, while atomic swaps ensure secure cross-chain transactions. Therefore, without smart contracts, Mintlayer cannot support AMM, but can efficiently facilitate order book-based trading.

Cross-chain Atomic Swap

Atomic swaps are crucial to Mintlayer's DEX functionality. These exchanges enable two parties to securely and trustlessly exchange assets across different blockchains. The key feature of atomic swaps is that the trade either fully completes or does not happen at all, ensuring that neither party loses funds due to partial completion.

Mintlayer's atomic swaps are achieved through Hash Time Locked Contracts (HTLC). HTLC combines two technologies: hash lock and time lock. The hash lock ensures that funds can only be transferred after revealing a secret code (shared by both parties), while the time lock ensures that the transaction is completed within a set time, otherwise it will automatically roll back and return the funds to the original holder.

This mechanism enables trustless transactions between different chains without the need for intermediaries. For example, if a user wants to exchange Bitcoin for tokens based on Mintlayer, HTLC will lock the funds on both chains until the transaction conditions are met. If the conditions are not met within the specified time, the transaction will be canceled, and the assets of both parties will remain unchanged.

HTLC is particularly important because it avoids the need for token wrapping or token bridges, which are often a source of failure in decentralized finance (DeFi). Bridges and wrapping mechanisms are often vulnerable to hacking or other forms of exploitation because they rely on custodians or intermediaries to manage assets. Mintlayer's atomic swaps eliminate these vulnerabilities by enabling direct interaction between Bitcoin native assets and Mintlayer tokens.

Time-locked contracts (HTLC) and on-chain order books

Mintlayer's decentralized exchange (DEX) also integrates time-locked contracts to facilitate atomic swaps. HTLC ensures that transactions either occur as expected or not at all, preventing partial transactions and ensuring the security of user assets. These contracts can lock funds until both parties meet the predetermined conditions, at which point the funds will be released to the new owner. If the conditions are not met, the funds will be returned to the original holder after a specified period of time.

In addition to HTLC, Mintlayer's DEX also supports on-chain order book. The system allows users to directly publish buy and sell orders on the blockchain. By using the on-chain order book, Mintlayer ensures transparent and fully decentralized transactions. The on-chain system avoids reliance on external databases or centralized order matching engines, which may introduce vulnerabilities and manipulation risks.

The working principle of the on-chain order book is to allow users to lock their tokens in the smart contract that records the orders. Other traders can see these orders and match them when they find appropriate trades. Since the order book is directly hosted on the blockchain, it cannot be tampered with or controlled by centralized entities.

No need for third-party platforms to maintain liquidity

Maintaining liquidity is an important aspect of any decentralized exchange. Many decentralized platforms rely on liquidity pools managed by third-party services, but Mintlayer takes a different approach. By integrating its DEX directly into the blockchain, Mintlayer eliminates the need for external liquidity providers. Instead, liquidity is generated through built-in features such as atomic swaps and on-chain order books.

The liquidity of Mintlayer DEX is further enhanced by its native support for MLS-01 tokens. These fungible tokens can be easily traded within the ecosystem, allowing users to create liquidity pools without the need for additional infrastructure. The system allows for programmable liquidity pools, which means users can configure pools to meet specific trading needs. This flexibility ensures that users can always find liquidity for their trades even without relying on external providers.

In addition, Mintlayer's liquidity method minimizes the risks associated with centralized liquidity providers, such as fraud, manipulation, or hacking. By keeping all liquidity management on-chain and decentralized, Mintlayer's DEX provides users with a safer and more reliable trading environment.

Avoid relying on third-party platforms

One of the most notable innovations of Mintlayer is its ability to be independent of third-party platforms. Many decentralized exchanges rely on token bridges, custodians, or centralized order books, which may introduce points of failure. Mintlayer mitigates these risks by enabling direct, trustless atomic swaps between Bitcoin and Mintlayer tokens.

By using atomic swaps instead of token bridges, Mintlayer eliminates the need for users to entrust their assets to third-party services. While token bridges are practical, they have become a frequent target of attacks in the DeFi space, resulting in the loss of millions of dollars in assets. Mintlayer's atomic swaps ensure that users always have full control of their assets, thus reducing the risk of asset loss or theft.

Highlights

• Mintlayer's DEX supports atomic swaps, enabling trustless cross-chain transactions between Bitcoin and Mintlayer tokens.
• HTLC ensures secure, time-limited transactions that either fully complete or automatically revert.
• The on-chain order book promotes decentralized and transparent trading without relying on external matching engines.
• Liquidity is maintained through programmable liquidity pools, eliminating the need for third-party platforms.
• Mintlayer avoids token bridges and custodians, reducing the risks associated with centralized or third-party exchanges.