What is Lykke?
Lykke is a fintech company, Lykke Vanuatu Ltd, designed for trading various classes of digital assets. It is an exchange of colored coins (issuer backed securities) where orders are collected and then matched to clients’ requests. The colored coins are built on the Bitcoin system. The matched orders are all cleared on the Bitcoin network while the unfulfilled ones are discarded.
Note that the exchange does not own the traded coins; however, the traders need to trust it to make the right matches. Therefore, by assuming a basic level of trust in the trader means providing some collateral in the form of digital assets.
The network employs the blockchain technology to help eliminate market inefficiencies that come with conventional exchanges.
What is the problem that Lykke Solves?
The primary markets for the cryptocurrency exchanges are the exchanges. However, most of the exchanges such as Bittrex and Poloniex among others are highly centralized. This implies that to trade in the exchanges, you are required to open a trading account and deposit some tokens there. Because of this centralization, these exchanges are considered more efficient. However, they also come with myriads of challenges that make them very risky.
- Serious security risks: If you take a closer look at most hackings and huge losses in the crypto niche, most of them took place in the exchanges. In 2011, 650,000 Bitcoins were stolen from Mt. Gox while Poloniex lost 12.3% of Bitcoins later in 2014. More recent attacks took place at Coincheck and YouBit exchanges where hackers made away with millions worth of Bitcoins and other altcoins. The later was forced to file for Bankruptcy.
- Risk of manipulation: In most of the centralized exchanges, the administrations set the charges for the transactions. This is the reason why most of the centralized exchanges implement very diverse fee schedules. For example, some charge both the maker and taker while others opt for one party.
- User data exposure in centralized exchanges: One of the primary goals of running a decentralized blockchain network is to facilitate anonymity when sending value or trading in the markets. However, most centralized exchanges require users to sign up with personal information. In fact, the exchanges are run in line with local securities trading laws.
How does Lykke Solve the problem?
To address the outlined shortcomings of the centralized exchanges, Lykke development team opted to follow the operational principles of simplicity and minimal risks.
They went for the technologies that had been proven to work and that had fewer risks compared to the existing models. The ideal distributed ledger according to the Lykke white paper would have been Bitcoin.
However, going for the Bitcoin would mean that only the native token, BTC, would be used. It is at this point that the idea of Colored coins was crafted.
1. The application of colored coins
“Colored coins”, as the name suggests means “coloring” Bitcoins and committing to provide underlying assets to the person who returns the coins. This implies that the colored coins are always linked to Bitcoin (the same way standard coins are bound by a few grams of metal).
The ideal solution for a centralized exchange is a decentralized one. But the decentralized ones are also inefficient because of the required lengthy chain of confirmations. The Lykke exchange is between a fully decentralized model like iDEX and centralized option such as Bittrex.
Lykke model ensures that completed trades are entered into the distributed ledger as the unfilled ones are discarded. You can also trade the assets ad hoc and can also be moved directly between the involved parties. This implies that the Lykke operates as a broker without holding the user’s deposits. Here is a demonstration of how the Lykke system works;
- The issuer starts the process by issuing IOUs in the form of colored coins. Note that these coins can represent anything; from stocks to real assets.
- Then, the trader who has Bitcoins or colored coins expresses the desire to trade the issued colored coins. For the trade to be initiated, an order has to be sent to Lykke in order to strike some level of trust. The traded asset has to be sent to the Bitcoin network.
- The exchange (Lykke) waits for traders to send the orders and then add them in the order book. The supported orders include Bid, ask, and Limit among others. The matching trades are cleared in the blockchain.
Note that for the transaction to move smoothly, Lykke can select an appropriate matching algorithm.
2. Leveraging trade
Trade leveraging in the Lykke platform follows the same model used in the forex market. To allow users trade with the bank funds as opposed to their own, they are required to transfer their asset to a managed wallet. The managed account operates like a standard bank account with the bank management taking full control over them. In this case, you need to appreciate that all the orders you place will have to first go to the managed account for verification.
3. The distributed ledger technology
To make the entire ideal of Lykke exchange work, the development team used the distributed ledger technology (Bitcoin in this case) to make it easier for more users to participate. However, the core library used at Lykke does not rely on Bitcoin as the main client to lower the risk of attack. Rather, the Lykke uses a core library to link to the Bitcoin network via JSON RPC Interface. The core library scans all the relevant information about transactions and keeps the balances in a verifiable account.
4.The native token
To facilitate effective governance of the Lykke network, the development team released a native token referred to as LKK. The tokens were released in an ICO held in October 2017 and raised $1.2 million from about 700 investors.
It is important to appreciate that in Lykke, the tokens are considered shares; 1LKK=1share in the markets. This also provides users with the right to vote on the system. For example, you will be called to vote when a new application or other major applications are to be implemented in the network.
What makes Lykke better than it’s competitors
The cryptocurrency niche has become highly competitive. Starting from 2009, more than 1700 cryptocurrencies have entered the market. Lykke stands taller than its peers for providing a unique marketplace that caters for diverse digital assets. Supporting more assets implies that more corporate entities and even individual users are likely to get meaning of these assets including tokens, cryptocurrencies, and asset-based cryptocurrencies.
- Lykke provides a clear intersection between banks and the blockchain system. This offers users with an opportunity to easily buy the preferred digital assets directly from their banks. Today, many exchanges such as Binance and Bittrex are crypto-to-crypto only. This requires users to start from different platforms that accept fiat. However, Lykke allows its users to directly purchase the tokens which make the process simpler, faster, and cheaper.
- The market value of Lykke has grown steadily since inception. Between June 2017 and January 2018, the price of the native Lykke token grew with more than 650% compared to the 2016 levels. The market capitalization also grew steadily during the same period to surpass other cryptocurrencies including Lampix and Ergo.
- The Lykke system provides users with a better platform to access and trade diverse digital assets. You can use Lykke to invest in the common cryptocurrencies such as Ripple and Bitcoin or others such as the colored coins for CO2 certificates and colored coins for music certificates.
- The Lykke system has helped to redefine the term “digital cryptocurrencies” and their trading. You no longer have to confine thoughts to the tokens released in the ICOs by companies. Indeed, anything can be turned into a digital asset. From music rights to the real estates and latest scientific research, Lykke will help to tokenize everything.
- To help Lykke and other coin users to draw more value from their tokens, Lykke also runs a marketplace. This implies that you can visit the marketplace and make a direct purchase. The marketplace utilizes a special corporate structure that makes the price low and deliveries prompt.
- Lykke is operated in line with the laws of the jurisdictions it is based in. therefore, users on the network do not need to worry about operating illegally. This compliance is implemented in the form of Know Your Customers (KYC) strategies such as providing proof of address and government-issued ID.
- The Lykke exchange model, though not completely decentralized, allows users to trade without holding their deposits. This lowers the risk of the assets getting stolen because they are not located in the same pool.
How can Lykke be categorized?
Lykke is a great demonstration of a network determined to conquer the current hurdles that lay on the way of blockchain network adoption.
The creative method used by the founders and the entire development team to circumvent the problems associated with decentralized exchange has impressed the cryptocurrency community. However, a lot needs to be done to operate more competitively in the current market.
Cryptocurrency experts have recommended that the Lykke team compare the platform with other top placed platforms such as Binance. This is not all.
They should also rethink the idea of total decentralization in order to attract more users especially those who want to operate in total anonymity.
What’s Lykke’s vision on Security?
The Vision of Lykke is providing users with the most secure platform for trading different classes of assets.
Though the development team has put a lot of efforts in ensuring that users operate securely, the threats facing it are numerous. Here are some of these risks that could compromise its main vision.
- Though the idea of working with colored coins was great, it is fast getting overtaken because of the changing operational circumstances.
- The Lykke system is prone to numerous risks such as financial risks, liquidity risk, and credit risks.
- Because the market does not have encryption, it stands as an easy target for hackers who want to especially pull personal information for traders in the platform.
- By relying on the Bitcoin network, it implies that Lykke also suffers some serious deficiencies reported on the network. For example, the danger of decentralized mining in the Bitcoin system implies that even Lykke is still at a serious risk of 51% attack.
Examples of Lykke’s use cases / applications
From an early development of the Lykke and the trading platform, Richard Oslen (the founder) and the entire development team wanted to outdo competitors by increasing the use cases. Here are some of these applications.
- The native Lykke tokens, like others such as Bitcoin and Monero, can be used to make purchases in different stores and platforms that accept them. If you cannot find a store that is already accepting Lykke, consider checking the platform’s marketplace. It is a complete e-commerce platform where users can buy fashion items, home products, and even services.
- LKK can be used as an investment or saving platform. Here, you only need to buy the tokens of an equivalent amount that you want to save. Note that if you are targeting to hold and sell when the value grows, the expected growth is only based on predictions. The myriads of factors such as the looming regulations across the globe and stiff competition could affect growth this growth.
- The native token can be used to pay for transaction fee at the different markets. Most markets will charge a fee based on the traded volume. You can pay that fee using Lykke.
- You can use Lykke to send value instantly on the native network. If you have some LKK tokens in your wallet, you can send them across the globe to transfer value instantly. This is done on a peer2peer basis so that no third party can know about your transaction details. It is cheaper than banks because they are centralized and designed to optimize profits. Note that both the sender and recipient need to be part of the network and have the right wallets.
https://coincheckup.com/coins/Lykke
https://www.lykke.com/city/blog/
https://www.lykke.com/LKK2Y%20whitepaper.pdf
https://www.lykke.com/media/lykke_whitepaper_march2016.pdf
https://www.lykke.com/media/Whitepaper_LykkeExchange.pdf