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An independent Layer-3 mesh network connecting brokers and exchanges
Yellow Network is designed to solve these problems. The decentralized model that Yellow is envisioning is one, in which businesses work together, utilizing a shared backbone for liquidity, similar to the way thousands of internet service providers and network firms are interconnected and regulated in their respective countries.
By connecting brokers and exchanges, Yellow Network acts as a blockchain-agnostic mesh network of connected nodes that aggregate liquidity cross-chain, thereby increasing efficiency, lowering slippage, and allowing for best trades execution. To unlock high-speed trading, Yellow Network uses a layer-3 state channel infrastructure, allowing for communicating and trading between brokers and exchanges in a decentralized way. In other words, Yellow Network is a broker-to-broker liquidity channel infrastructure.
As such, Yellow Network is not based on any single blockchain, but a network of different intermediate nodes powered by Yellow Network code and run by brokers and exchanges connected to one another. This way, Yellow Network participants can do high-frequency trading among each other in a peer-to-peer way, using a smart clearing protocol to pool on-chain collateral that minimizes counterparty risks and protects broker-to-broker liabilities exchanged off-chain.
Yellow Network's centerpiece is its state channel smart clearing protocol, which is fully decentralized. The collateral that is locked in a state channel is controlled by a smart contract that is ultimately controlled by the parties that have opened the state channels. Thus, no funds are ever under the control of Yellow Network, making the system non-custodial from the perspective of its participants.
By creating a clearing and settlement system for communicating trading liabilities, updating states within state channels, and carrying out state channel challenges, Yellow Network is a combination of the SWIFT messaging protocol as well as an ECN direct order matching protocol. While SWIFT and ECN facilitate a broker's access to global financial markets of traditional markets, Yellow Network does the same for digital assets. And through this clear-cut setup, Yellow Network is contributing to the separation of powers, duties, and responsibilities by mimicking one essential part of the traditional finance stack -- the clearing house.
Liquidity aggregation helps smaller, specialized participants to offer better pricing and handle larger volumes of trades. End-users can trade additional token pairings which they otherwise would have to move to another broker, exchange, or chain.
Trades can be settled across various brokers and exchanges without moving assets to other chains or platforms. An automated netting process greatly reduces the risk of overexposure to any given party.
Transactions between Yellow Network participants are handled off-chain via state channel technology, thus not congesting the underlying blockchain. Our Layer-3 network allows for a high transaction throughput at a low cost, where participants can swap their tokens cross-chain without bridging or wrapping them.
The clearinghouse can accurately report transaction data to regulators and participants, thus lowering the reporting burden for traders and brokers. At the same time, it can increase the safety of the marketplace overall by helping to identify and exclude bad actors.