AMM or Orderbook, that is the question!

Why DeFi must choose AMM rather than orderbook

0xAlpha

  1. Informational: they can see more depth in the orderbook (while most people usually can only see bid1 and ask1 unless paying more);
  2. Technological: they can run their trading programs on a server with extremely low latency (the so-called co-location) to front-run most other people;
  3. Financial: their trading costs are usually significantly lower than ordinary people’s (sometimes even negative).
  1. In traditional finance, you have to be both privileged and skilled;
  2. In some crypto centralized exchanges, you don’t have to be privileged but still have to be skilled;
  3. In AMM-based decentralized exchanges, you don’t have to be privileged or skilled.
Transaction fees generated by the USDC-ETH pool on Uniswap V3. Anybody can participate in the liquidity-providing and share these fees without market-making expertise. (Screenshot taken from info.uniswap.org as of 2022–6–25)

What about orderbooks in “DeFi”?

At the moment, the leading way of providing liquidity for trading is AMM. However, there are also “DeFi” platforms adopting the orderbook mechanism, of which dYdX is the leading example. The fact is, most of them are nothing but fake “DeFi”. Transactions on such platforms usually take place on their own dedicated server (or AWS server), only connected to blockchain networks by some “layer2 technology”. Connecting an order-matching engine running on a centralized server to Ethereum by some layer2 technology does not make it decentralized. Neither does adopting a so-called “standalone blockchain” (or app chain), as announced in dYdX’s V4 plan. While adopting a standalone blockchain might make it more decentralized since “each validator will run an in-memory orderbook”, it does not change the fact that the transactions (order-matching) take place on off-chain servers. The validators are there only to make sure the transactions are legitimate. Such platforms lack almost every advantage that a DeFi project has: composability, transparency, and interactability.

The LP net value growth of Deri Protocol‘s Main pool since Jan 2022 displays how anybody can share the profits of derivative market-making. (Screenshot taken from info.deri.io as of 2022–6–25)

About Deri Protocol

Deri, your option, your future!

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Deri Protocol

Deri Protocol

Deri Protocol = (Perpetual Futures + Everlasting Options) x Decentralized.