💡Limit Order Book
The New York Stock Exchange, Nasdaq, Binance and Coinbase all have one thing in common. Their exchanges are built around a limit order book (LOB).
A LOB is a dataset of bid and ask orders. Traders can place a bid at the price they are willing to buy an asset. If they want to sell an asset they place an ask price alongside the volume that they are willing to trade at the price. At any time traders have the option to either place an order in the book outside of the competitive market price or to take liquidity at prices offered by other traders.
ODEX is built on a modern decentralized limit order book, designed to incentivize competitive price discovery and an efficient trading environment.
ORDERBOOK vs AMM
Since 2017, Ethereum has been plagued by high gas fees due to demand for limited block space and computation power across the decentralized network.
In 2018 Uniswap launched which introduced a new model for swapping digital assets. The automated market maker revolutionized the space connecting traders with liquidity providers and optimized for high gas fees.
As Ethereum scales to have fast, cheap transactions and unlimited computational capability through layer 2 rollups, the advantages of a LOB DeX become within the capabilities of blockchain systems.
LOB DeX’s allow traders to specify the price at which they are willing to buy or sell an asset, leading to more efficient price discovery. This is in contrast to AMM DEXs, where the price is determined by a mathematical formula based on the ratio of the assets in the liquidity pool.
The increased speed and reduced cost of transactions will allow for more frequent and granular price updates in a LOB DEX, leading to more efficient trading and better, more intuitive user experience.
AMM DeX’s have made frontrunning and sandwich attack MEV bots the norm. With LOB design the user’s bid price can either be filled or not filled, reducing the attack vector of MEV searchers.
Slippage is a huge problem in DeFi which is why centralized exchanges still reign king despite the FTX collapse. ODEX contains a number of game theory optimal nuances to maximize liquidity within a tight range creating improved liquidity at and around the mid price between bids and asks.
The majority of liquidity providers on AMM’s are notoriously unprofitable due to an effect called impermanent loss. This occurs when one asset goes up in value and the liquidity provider’s position fills up with the lower valued asset. Market makers on LOB DeX’s do not suffer from impermanent loss as users trade directly into the order book.
Limit order books offer traders more options and a more sophisticated trading experience. They can place limit orders, market orders, take profit orders and stop losses.
A NOVEL IMPLIMENTATION OF THE TRADITIONAL LOB
ODEX is designed around the traditional order book model with nuances to fit modern blockchain environments.
Any user can deploy a new ODEX order book for any asset pair.
Each order book has a limited number of slots for bids and asks.
These slots are filled based on price and volume with leading bids and asks overwriting less competitive orders.
Same priced orders are filled by highest volume first as opposed to first in first out with traditional LOB's
Min order size to discourage spoofing
Fee-less execution for maker, 10 bps fee for taker
Governance token incentives to bootstrap early liquidity, adoption and trading volume
Orders that aren’t competitive, outside the top 100, are not included or presented to other traders incentivizing efficiency and liquidity through free market dynamics.
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