AMM Vs. OrderBook, How Will The DEX War Explode In The Future?
From the early Bitcoin electronic cash system to Ethereum represented by EVM, and cross-chain projects Polkadot and Cosmos, to the rise of NFT, DeFi, and DAO, the crypto world has slowly transitioned from the barbaric era to multiple application scenarios.
BSC/Solana/Avalanche, a low-cost, high-speed smart contract public chain, has absorbed tens of billions of dollars in user management assets, and Arbitrum/Optimism/Polygon’s L2 blockchain aimed at supporting the expansion of Ethereum is becoming an integral part of the blockchain infrastructure market.
We are experiencing an era of strong infrastructure. With the maturity of these smart contract public chains, DeFi, a complex and high-performance financial system, can be applied.
In a sense, the birth of DeFi has changed the situation of “strong protocols, weak applications” in the industry. Its birth has brought new application value directions to crypto finance, and at the same time, it has also provided opportunities for the transformation of traditional financial models in the future.
Important reference, DeFi has developed a variety of models, such as stable currency, lending, DEX, derivatives, prediction market, insurance, payment platform, etc. in less than two years, and among these models, DEX The model is more successful because it innovatively proposed AMA (Automated Market Maker Mechanism) earlier, which brought it a huge traffic base, which made it far ahead of other DeFi track protocols in terms of market value.
Compared with traditional exchanges, DEX has obvious advantages: it can achieve the smallest slippage transaction, AMM market-making mechanism, liquidity mining mechanism, etc., which greatly improves the user’s transaction efficiency and transaction experience because it has advantages that CEX does not have, so currently DEX is a very important part of the entire crypto ecosystem.
DEX ecological tracklist
The birth of DEX can be traced back to Counterparty as early as 2014. At that time, the platform provided Counterparty DEX innovative functions, and all Counterparty tokens could be traded on the DEX based on the Bitcoin network. Then OasisDEX on Ethereum opened the first on-chain matching and settlement and became the early source of liquidity for platforms such as Uniswap and DYDX.
After OasisDEX, mature spot funds such as Uniswap, SushiSwap, and Curve gradually appeared. DEX, as well as DEX of DYDX and Kujira’s derivatives contract system, and OrderBook DEX like D5 Exchange, which has low slippage, aggregated liquidity, and multi-chain transactions. After several years of ups and downs, DEX has now evolved into four branches, starting with The current categories are mainly divided as follows:
|Classification of DEX||Name of DEX|
|AMM spot||Uniswap, SushiSwap, Curve, Balancer, QuickSwap…|
|Aggregator||1inch, Dodo, D5 Exchange, Matcha, ParaSwap, CowSwap…|
|Derivatives||GMX, Gains Network, DYDX, Perp…|
|Order book||DYDX, D5 Exchange, Kujira, HyperliquidX…|
The main representatives of each DEX track:
(1) AMM spot: DEX that provides spot exchange transactions; representatives: Uniswap, SushiSwap
Uniswap: As the leader of DEX, Uniswap has been the king for a long time, and its trading volume can reach half of the DEX market. The reason for its success is the success of the AMM mechanism, and the second is the wealth effect, Uniswap has gone through different stages from V1 to V3, from solving the limitations of constant product market makers at the beginning to optimizing automatic market makers, and then to improving the capital utilization rate of range prices, so as to maximize LP returns , Uniswap has achieved the greatest optimization at the technical level, because of its extremely high product usage rate, and the average daily transaction volume exceeds one million US dollars.
SushiSwap: As its “fork” nature, SushiSwap could have a fist bump with Uniswap in terms of the market share when it was fledgling because it started liquidity migration at the time of launch and absorbed 50% of Uniswap’s liquidity but soon fell completely. In terms of disadvantages, SushiSwap is no different from Uniswap in terms of technical characteristics. It continues the design of Uniswap and does not constitute a new model.
It also adopted the exchange pool + AMM model in the early stage. Therefore, as a “shadow” type of existence, in Uniswap v3, Curve and other strong rising stars have begun to exert their strength, and they are no longer in the discussion of the top 10 DEX. By comparing the transaction volume, the gap between SushiSwap and Uniswap is huge. SushiSwap is now facing the problems of increasing liquidity loss and insufficient product model innovation.
(2) Stablecoins: Mainly serve the asset transactions of stablecoins (USD class); representative: Curve
Compared with Uni, Sushi and other spot DEXs that focus on volatile asset transactions, Curve provides extremely stable and efficient stablecoin (USD) transactions. It supports users to trade stablecoins with low slippage and low transaction fees, greatly alleviating the impermanent loss pressure of LP users. The core design of Curve is the swap curve of stablecoins.
This swap curve is smoother in the range around 1:1, so Curve can achieve a higher rate than CEX in small transactions. This is one of the main reasons why he can attract users. Although it also uses AMM, compared with Uni and Sushi, it has established a series of unique innovative mechanisms to encourage LP to provide liquidity. Business capabilities are ahead of the industry.
(3) Aggregator: DEX that improves transaction efficiency by aggregating the liquidity of major decentralized exchanges; representative: 1inch
1inch is the earliest DEX that brings together the liquidity of decentralized exchanges. It helps traders improve transaction efficiency by finding the optimal token exchange rate. At the same time, 1inch is also the best DEX aggregator at present. 1inch uses the Pathfinder algorithm It can help users find the best transaction path within 1 second, which greatly improves the user’s exchange speed.
1inch supports users to choose the lowest gas fee or choose a path with higher overall returns to meet the various needs of users. Although it can provide users with better quotations, in order to maintain this advantage, 1inch needs to continuously collect more flow performance and lower gas costs.
(4) Derivatives: DEX that provides derivatives transactions; representative: DYDX
DYDX, which uses StarkWare’s expansion solution, not only provides lightning transaction speed comparable to CEX but also adopts CEX’s OrderBook mode. DYDX introduced multiple liquidity providers in the early stage and designed transaction mining and liquidity.
The mode of rewarding property providers has attracted a lot of liquidity, and its trading volume has surpassed Uniswap. In order to improve the efficiency of product and asset usage, DYDX uses the mode of OrderBook under the chain and order settlement on the chain, so in the trading experience, It is also closer to CEX.
Existing problems of DEX and direction of attack
Judging from the data report, the TVL of DEX has accounted for more than 50% of the DeFi market for a long time. Without the support of DEX, DeFi will not be able to rotate the giant wheel of the crypto market, but there are advantages and disadvantages.
Although DEX is adhering to decentralization To provide users with safe financial services under the concept of DEX, there are also more prominent problems. At the beginning of the DEX explosion, the most criticized problems of DEX to users were poor transaction depth, impermanent losses, and slow speed.
Transaction volume problem: Compared with giants such as Binance, Coinbase, and FTX in CEX, the current DEX transaction volume is relatively small, and the most intuitive problem of transaction volume is the lack of transaction depth, which is caused by comprehensive factors, compared with the professional market makers of CEX, the depth of DEX can be said to be completely exploded. Although it has done very well in some currencies, there is still a big gap with CEX in terms of overall depth.
Trading experience issues: In terms of trading experience, DEX does not require KYC of traditional centralized exchanges, and at the same time, assets are managed by itself, which guarantees its own privacy and asset security, but the disadvantages of DEX are also obvious, such as impermanent loss and slippage. Questions etc.
Secondly, due to the lack of transaction depth, traders have to face higher transaction slippage than on CEX. These all bring potential losses to traders and are also obstacles to the development of DEX.
However, with the birth of OrderBook DEX on the chain like D5Exchange, under the support of the innovative model of GMPB+GPML, impermanent losses and transaction slippage have some With a great improvement, traders can accurately carry out pending order transactions according to their own needs. Chart K-line trading can make each price transaction clear and transparent, and the trading experience is smoother.
Asset usage issues: DEX relies on smart contracts to match transactions between users. Based on smart contracts it is completely decentralized and not supervised by a centralized party, which means that traders can deploy enough funds to take advantage of the transactions in the agreement. Vulnerability and no one can intervene to prevent it from happening. The Mango incident is the best negative case. Hackers used tens of millions of dollars to consume 116 million dollars of liquidity. Secondly, DEX will cause slow transactions and expensive Gas fees due to network congestion.
This reduces the user’s financial efficiency to some extent. DEX guarantees the transaction sovereignty of users and ensures the security of users’ transaction assets under the premise of broadening the user threshold. Most DeFi entrepreneurs are innovating solutions to improve the applicability of DEX. Some obvious problems, such as there is currently no DEX that satisfies a platform that is suitable for reasonable transactions of various currencies.
Uniswap is not suitable for long-tail DeFi asset transactions, while Curve is more suitable for stable currency transactions. DEX that uses off-chain transactions such as DYDX can provide CEX trading experience, but there are security risks, so the current DEX market has long lacked a product that has the trading experience of CEX and has a good depth.
The competition in the diversified DEX track is intensifying, and innovation has become the key
Where there is a market, there will be competition, and the competition of DEX is the same. Whether it is in the field of spot, aggregator, or derivatives futures, a powerful DEX will occupy a place in the market, which is reflected in optimizing transaction efficiency, user experience and model innovation.
Optimizing transaction efficiency represents DEX developed on efficient smart contract public chains, such as the well-known PancakeSwap on BSC and QuickSwap on Matic, etc., which can ensure the transaction efficiency of users when dealing with different network environments and save its transaction costs, of course, there are many old-fashioned DEXs, including UniswapV3, SushiSwap, DODO, Bancor and many other DEXs, which are deployed on the L2 network to improve the transaction efficiency of the platform. Remain competitive.
In terms of trading experience, because the initial DEX basically adopted the automatic market maker mechanism (AMM), and many users are used to trading through the chart K-line and OrderBook mode, in order to meet the needs of users, OrderBook-type DEX Spontaneously, although this type of DEX is a decentralized model, it provides a user experience no less than that of CEX, such as D5 Exchange, DYDX, and MESprotocol.
Which is more suitable for DEX, AMM or OrderBook?
Generally speaking, the first thing a DEX needs to solve is its liquidity problem because there is no market maker model, so it is necessary to motivate each liquidity provider to become a market maker to expand the size of the liquidity pool so as to ensure a fair response price.
The biggest advantage of AMM is that it can still be traded even in an illiquid market, and AMM can enable traders to always get quotes, regardless of the number of valid orders submitted to the trading platform. But the disadvantages are also very obvious: low capital efficiency, high slippage risk of large orders, impermanent losses faced by liquidity providers, etc.
OrderBook relies on traders to submit a summary list of buy and sell orders on a given trading pair, allowing traders to buy or sell assets at a specified price and relying on market makers to provide liquidity by placing limit order lists on both sides of the transaction, market makers will receive fee rebates to incentivize them to provide liquidity. OrderBook has always been an ideal choice for liquid markets, and it is also the best choice for displaying market prices and large orders. It can reduce the risk of slippage and is widely accepted by institutional and individual traders. It is obvious that OrderBook can be used on DEX to do better.
But which mode to choose has a lot to do with the environment in which the project is located, and it’s business direction. DYDX chose the OrderBook mechanism because it was deployed on Ethereum in the early stage and needed to use the OrderBook mode to improve order settlement and transaction performance.
For D5 Exchange, which also uses OrderBook, the AMM mechanism DEX will only be applicable to stable currency transactions to become a core facility in the Ethereum ecosystem; order books still need to be adopted, and how to run order books on the chain needs to be solved.
The breakthrough of D5 Exchange lies in the successful operation of the order book on the Ethereum mainnet with its unique OrderBook mode and algorithm. We believe that what D5 Exchange is currently doing has a forward-looking significance for the choice of mechanism mode of DEX in the future.
(1) GMOB+GPLM transaction engine
D5 Exchange is the first fully decentralized exchange developed based on the Gridex Protocol that combines the characteristics of the order book and AMM trading mechanism. Gridex Protocol is the first fully decentralized protocol based on the order book on Ethereum. Grid Maker Order Book (GMOB ) and Grid Price Linear Movement (GPLM) are innovative technologies of the Gridex Protocol.
The Grid Price Linear Movement (GPLM) algorithm is used to handle transaction execution and settlement. The GPLM algorithm can achieve the same level of resource consumption as the Constant Function Market Maker (CFMM) algorithm, effectively reducing the Gas cost of D 5 Exchange running on Ethereum. consume.
Secondly, compared to the traditional OrderBook, which is a limit order mode, D5 Exchange uses maker orders, which allow buy and sell orders to existing both above and below the market price. Of course, maker orders can also be placed at the current price. If the current market price changes, it will be possible to be traded.
The maker order may not be the same as expected only when the order is placed on the market. Even if the user places the wrong order, it will not have much impact. Also, because D5 Exchange is an order book on the chain, it needs to consume Gas to complete the pending order when placing the order. It is worth mentioning that the GMOB model is based on L1 chain transactions, which is a huge improvement compared to many DEXs that use L2 or even off-chain matching.
(2) Internal and external liquidity aggregation ensures sufficient liquidity
From the perspective of liquidity, D5 Exchange is not an exchange in the traditional sense. Even without a market maker, D5 Exchange can still run perfectly. The sufficient liquidity of D5 Exchange can guarantee users a deep trading experience. Gridex has integrated UniswapV2 V3 And Curve’s liquidity, and provide the best exchange rate. It has its own maker list internally.
Even if there is no market maker, Gridex’s internal and external liquidity ensures that as long as users have a demand for buying and selling, then its liquidity will always exist. D5 Exchange supports placing orders at any price. When extreme market conditions occur, sometimes, it can be sold at extreme prices. This ensures the validity of the transaction.
(3) Completely decentralized “centralized trading experience”
Compared with DYDX and EtherDelta, which maintain OrderBook off-chain to realize on-chain settlement, D5 Exchange chooses to deploy the order book on the chain and simultaneously realizes the two-way matching transaction mode between on-chain and off-chain.
By introducing OrderBook to provide intuitive transaction icons, it is absolutely excellent liquidity depth combined with lossless transactions and low gas fees, allowing D5 Exchange to provide a trading experience no less than that of CEX.
Secondly, D5 Exchange adopts the L0-layer Gridex multi-chain protocol, which will allow users who conduct transactions on D5 Exchange to choose the supported network and improve the efficiency of asset exchange.
(4) Grid mechanism meets different token trading environments
D5 Exchange adopts the Grid mechanism. The Grid mechanism itself is set to help different token transactions. The maker list of D5 Exchange must be included in a specific Grid. Grid is divided into three types according to the granularity of the unit price range (referred to as resolution).
Grid is suitable for different types of tokens from small to large. A finer Grid is more conducive to quick transactions; for trading pairs with high volatility, maker prefers a coarser Grid to obtain better fee income; the market will prompt users to place orders in the appropriate Grid, and the essence Generally speaking, it is the balance between order transaction efficiency and fee income ratio.
The innovation direction of future DEX
The D5 Exchange model provides a good solution to the current DEX drawbacks. In the future, DEX will be more inclined to develop around the direction of user transaction sovereignty and how to improve the depth of liquidity. Currently, the application of OrderBook provides DEX with The applicability of traditional CEX, while AMM provides a non-regulatory and review-free solution for trading liquidity pools, coordinating the relationship between liquidity, transaction efficiency, and capital return will be the main direction of DEX development in the future.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.
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