The road to a fully on-chain order book on Fuel
DEXes vs. CEXes
Centralized exchanges dominate in terms of volumes due to both API and UI availability, and liquidity. CEXes are a ‘comfort zone’ for the traders coming from Tradfi bg, since the onboarding is similar. They also win over the DEXes in terms of latency and throughput. The biggest challenges for CEXes are the regulations, so they adapt to all of them, and high fees, making them less appealing for traders looking to minimize operational costs. Striking a balance between UX and decentralization is crucial for building a sustainable and inclusive trading environment in the evolving landscape of cryptocurrency markets.
DEXes have been a beacon of decentralization in crypto trading, giving traders sovereignty over their assets and trading strategies. Still, DEXes today come with some notable drawbacks, such as complex onboarding, high fees, and limited trading functionalities. While CEXs still dominate trading volumes, the need for easy no-KYC access remains as crucial as ever (especially for select jurisdictions). This blog delves into the necessity for innovation in order book solutions and how platforms like SparkFi are leading the way toward a more secure and efficient decentralized trading ecosystem.
Order books vs. AMMs:
Automated market makers and order book-based systems are two distinct architectures used in DEXes today. AMMs like Uniswap and SushiSwap use liquidity pools and algorithmically determine asset prices, while order book-based systems like 0x and rely on traditional order-matching mechanisms. AMMs offer simplicity and accessibility, while order book-based systems provide advanced trading features. AMMs excel in providing liquidity and reducing slippage, while order book-based systems offer more robust price discovery mechanisms catering to diverse trader needs.
In the spot market, Automated Market Makers (AMMs) are the dominant players. However, they are often criticized for being nonintuitive and difficult to use. Due to impermanent loss, high slippage, and lack of flexibility, they struggle to meet users' diverse needs. AMMs are most suitable for trading less volatile pairs, such as swaps between stablecoins.
AMMs cannot automatically balance token exchange rates, so arbitrageurs are needed to align the token prices of the AMM with external markets. This process helps mitigate losses caused by price imbalances, but withdrawing tokens from the pool when prices are distorted results in permanent loss.
AMMs do not use order books and instead rely on liquidity pools. This setup allows any order to be filled, but price slippage can occur if there isn't much liquidity. Additionally, pools don't support limit orders, and swaps are executed at the current price.
The second dominant architecture design uses an off-chain order book and on-chain settlement. It is more capital efficient than AMM-based DEXes and optimizes reducing gas fees, but has a reliance on off-chain components, which introduces regulatory, censorship, and liveliness risks. Order books, found on CEXs, offer advanced functionalities compared to AMMs. They display different sections for buyers and sellers, allow users to place limit orders, and automatically execute trades when the asset hits the set price.
An order book style DEX?
On-chain order book vs CEX order book:
Trustlessness is a fundamental feature of decentralized exchanges. On-chain order books effectively prevent interference by any centralized party, guaranteeing fairness for all customers. Users have the freedom to trade from non-custodial wallets without entrusting their funds to the exchange, enhancing security. By placing the order book on the blockchain, the exchange ensures resistance to future centralization, solidifying its decentralized nature. These robust measures collectively create a secure and equitable trading environment for all participants.
On-chain order book vs DEX liquidity pool:
Using limit orders in cryptocurrency trading gives you way more control over trade execution. Unlike market orders, limit orders are filled at specific price levels set by the trader, eliminating the need for constant monitoring. This strategy offers predictability and flexibility that is particularly beneficial for inexperienced DEX users impacted by price movements in low-liquidity AMM pools.
To be able to reproduce the matching function of an order book, a blockchain needs to have ultra with low latency and throughput to satisfy the requirements of high-volume trading:
High throughput: orders need to be matched almost instantly for the CLOB to be updated in real time. More so, a slow order book would create malicious opportunities for front-running orders.
Low fees: Each price match executed on-chain generates extra gas fees, so it’s pretty expensive to use a chain like Ethereum for every single order book trade.
Enter SparkFi: a fully on-chain order book on Fuel
SparkFi's order book sets itself apart in the DeFi space with real-time settlement, reduced counterparty risk, and enhanced transparency. Our CLOB operates entirely on-chain, mitigating counterparty risk and providing traders with full control over their assets. We prioritize trading speed and security with on-chain composability and intent-based liquidity to empower traders with customizable trading strategies and extra perks like earning yield on trading assets.
