Overview

At launch, 21X will be a licensed trading and settlement system for DLT Financial Instruments that uses a central limit order book model implemented by smart contracts on the blockchain that are connected and supported by off-chain components to facilitate compliance and integrations.
System Architecture

The core of 21X’s DLT TSS is a system of smart contracts deployed on the Polygon blockchain that enable the trading and settlement of DLT Financial Instruments between users.

The main difference from a decentralized crypto-exchange – such as, Uniswap or Curve – are the specific additional requirements that need to be met.

Firstly, 21X is operating in a regulatory environment and, secondly, the system will be integrated into a range of external systems from providers and business partners not only from the Web3 space but also from traditional finance. Thus, the system sits directly at the interface between DeFi and TradFi and will dissolve the clear barrier that presently exists.

For this reason, 21X is building a set of purpose-oriented off-chain services that complement the system of smart contracts by facilitating integrations, providing access for users as well as ensuring the compliant operation of the venue.This also means that there will be different ways of accessing the trading system ranging from the typical DeFi self-custody wallet experience to fully integrated solutions with institutional custody.

Core Technology and processes

Distributed ledger technology (DLT)

Blockchain

21X uses a public permissionless blockchain as the foundation of its market infrastructure. Orders can be directly placed by participants through smart contracts while transactions are being recorded on a distributed ledger fostering transparency and immutability. 

Smart contracts

Self-executing programs that are being deployed on a distributed ledger, are a ground-breaking technology in automating capital market processes. 21X uses smart contract-based orderbooks to enable trading and settlement of financial assets with verifyable terms in an automated, transparent and secure manner without intermediaries. 

Tokenization

Tokenization is revolutionizing capital markets, with Distributed Ledger Technology (DLT) and blockchain replacing traditional settlement infrastructure. In the coming years, over EUR 200 trillion worth of bonds, stocks and investment funds will be tokenized worldwide. Using asset tokenization, will further unlock access and liquidity for private and real world assets at a global scale.

Digital Identity

As a regulated financial institution and trading venue, we use a compliance layer to collect and verify information of participants according to Mifid II regulations. By applying KYC, AML, Blockchain Analytics and Whitelisting concepts 21X manages digital identities in a secure and efficient manner.

Trading process

1. Order placement

Users create orders to buy or sell DLT financial instrument as blockchain transactions with their own wallets.

2. On-Chain Matching Engine

21X’s smart contract based matching engine analyses orders against the on-chain order book, identifying matching pairs based on price, time and quantity.

3. Order Execution

Orders in the orderbook are deleted and/or created based on the outcome of the matching process.

4. Settlement

The smart contract verifies the trade terms (e.g., price, quantity) and ensures both parties meet the necessary requirements (e.g., sufficient funds).

5. Atomic settlement

21X’s smart contracts settle the trade atomically within the same blockchain transaction when the matching and order execution takes place. DLT financial instruments are transferred between the respective wallets of the users and the on-chain custody of the order book. This eliminates the risk of one party failing to fulfil their obligation.

6. Transaction recording

The completed trade details are permanently recorded on the immutable blockchain ledger, accessible to everyone.

Management and Security

Security protocols

Robust security measures are likely implemented, including multi-factor authentication, multi-signature wallets, secure key storage, and regular Smart Contract Audits and penetration testing to safeguard user assets and prevent unauthorized access.

Regulatory compliance

21X operates under the EU DLT Pilot Regime, which necessitates adherence to Anti-Money Laundering (AML) and Know-Your-Customer (KYC) regulations. This ensures user identity verification and helps prevent illegal activity.

Whitelisting

For regulatory, compliance as well as investor protection purposes DLT FIs can only be held and/or traded by authorized participants. This necessitates connecting a participant’s off-chain data with the respective on-chain account, which is whitelisted if all criteria are met. Different tokenizers use different technical implementations to realize and track this connection for their respective security tokens. 21X will be compatible with multiple tokenizers and is exploring partnerships with leading market players.

In the base case where the 21X token standard is used, all addresses that are eligible to trade a specific DLT FI token on the venue are stored as data structure in a smart contract that represents the whitelist for that asset. This data is updated based on information that is processed by the off-chain components such as KYC, AML and other relevant data points via the admin account of 21X.

Off-chain components

While the trading and settlement engine is deployed on and will be operated by blockchain technology, additional services and components are necessary to operate the overall system in a compliant manner and facilitate integrations with service providers as well as partners. These services and components are implemented using a microservices architecture to ensure high availability, scalability, and security. They are hosted in secure cloud environments on AWS with cloud agnostic principles in mind.

Multichain

Our multichain journey starts with Polygon

Our multichain journey starts with Polygon. As we are fostering an open ecosystem we believe that there is not one chain to rule them all. The first version of 21X is deployed on Polygon using Solidity Smart contracts. Through the use of different multi- and cross-chain solutions 21X will grow to other public and permissioned blockchains to enable all digital assets to trade on 21X.

The first product version of 21X will be running on Polygon (Proof of Stake) due to general market considerations as well as the specific requirements of being at the frontier of DeFi and TradFi. The blockchain excels in attributes essential for a high-volume decentralized exchange, including smart contract capabilities, security, scalability, low latency, low transaction costs, and developer-friendly tools. It also has a solid user base. Additionally, Polygon already has considerable traction with DLT FIs/Security tokens (e.g., 60m Siemens AG digital bond) and is a proven solution with documented data from years of operations under high demand. These are important considerations for regulators as well as for many of 21X’s partners that will integrate a DLT solution for the first time.

However, while Polygon POS serves current needs well, the vision of 21X – and the stated objective of the DLT Regime – is to disrupt and replace the TradFi infrastructure with a DLT-based solution. Different markets and trading types, as well as different market participants, will necessitate different requirements on the infrastructure. So, instead of relying on a single general purpose blockchain, 21X will evolve into a multi-chain platform to foster an open ecosystem, mitigate risk and benefit from innovation of the space in the best way. This will involve deploying 21X on other DLT solutions, using interoperability protocols as well as potentially utilizing a private Layer 2 or Layer 3 solution dedicated to 21X, such as a private instance of Polygon’s zkEVM.

Contact Us

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Address

21X AG

Große Gallusstraße 16-18,
60311 Frankfurt
Germany

21.finance AG

Industriering 40
9491 Ruggell
Liechtenstein

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