[Kine Academy#2] Peer-to-Pool vs Order Book in Trading

5 min readJan 17, 2023

Introduction

If you want to be a professional crypto trader, you must understand how the underlying system in exchanges work. In particular, the perpetual futures market is now experiencing a revolution in the form of trading systems, from traditional 📘 order book to the innovative 🏊 peer-to-pool model. These new methods are changing the way traders engage with the crypto markets, providing them with additional liquidity and better price discovery.

What is an Order Book System?

Basically, an order book is a list of open or outstanding orders for a given cryptocurrency pair. An order book normally consists of four basic elements: price, amount, buyers and sellers. Each crypto trading pair on the exchange has its own order book.

It is a system that is often used in traditional centralized exchanges, where buyers and sellers can place orders at specific prices, and the order book of the exchange matches those orders to facilitate trades.

However, there are a few potential disadvantages of using an order book, such as the possibility of market manipulation by market makers and flash crashes.

Moving on to AMM

Therefore, more decentralized exchanges (DEXs) are turning to Automated Market Maker (AMM) mechanisms to overcome those drawbacks.

AMMs are algorithms that automatically set the prices of assets in a marketplace based on supply and demand dynamics. They are often used in decentralized exchanges to provide liquidity and facilitate trades between buyers and sellers without the need for a central authority or market maker. A well known type of AMM-based DEX is Uniswap, which involves liquidity providers (LPs) and swap traders.

As shown in the graph above, when a buyer buys BTC with USDT in the liquidity pool, they are essentially exchanging their USDT for BTC at a certain price with the pool. As the BTC price is actually affected by the supply and demand inside the liquidity pool (following the formula X * Y = K), this exchange action therefore moves the BTC price higher.

Alternatively, if a seller sells BTC for USDT in the liquidity pool, the quantity of BTC in the pool increases while the quantity of USDT decreases, resulting in a decline in BTC price.

Kine Protocol Mechanism — Peer to Pool

At Kine Protocol, similar to AMM, we are utilizing the innovative Peer-to-Pool model for perpetual futures market. A peer-to-pool model is a self-matching algorithm where buyers and sellers enter their orders into a pool together and the matching engine executes trades at predetermined prices which come from price feed oracle. Unlike traditional exchanges which rely on order books for executing trades, in Peer-to-Pool model all transactions are conducted through the central liquidity pool.

This model involves two counter-parties, the liquidity providers (LPs) and perpetual contracts traders. Liquidity providers deposit their crypto assets such as BTC, ETH, USDT and USDC, then these assets will be converted to the total USDT value of the liquidity pool with a certain ratio. The liquidity pool bears the net positions generated by both long position holders and short position holders.

For example, all the buyers on the platform generate 100 USDT long position in total while all the sellers generate 80 USDT short position. The traders’ total net position is 20 USDT long and the liquidity pool bears 20 USDT short position.

Our price feed for a particular asset comes from a weighted average of that asset’s price on multiple major exchanges, such as Binance, OKX and Uniswap. The use of a weighted average price feed can provide a more stable and reliable price for the asset, as it helps to reduce price manipulation and ensure that the price of the asset within the model is more reflective of the overall market.

This enables trades to be completed quickly as all trades are executed at real-time price indices. In addition, users can access higher liquidity levels created by the pool. Liquidity providers bear inventory risk, and are rewarded by fees income (trading fee & funding fee) and PNL, while traders can enjoy lower slippage and one-stop market exposures.

Conclusion

In conclusion, Peer-to-Pool offers the benefit of fast execution, lower fees and slippage. At Kine Protocol, we also expect cross-chain experience to play a large part in our growth and user experience improvement. Now we support Etherum, BNB Chain, Polygon and Avalanche, and will be expanding in the future.

About Kine Protocol

Kine Protocol is a decentralized trading platform. We thrive on delivering seamless, low cost and high-efficiency trading experience for all users. The platform began with a peer-to-pool model which ensures deeper liquidity with super low slippage for a better trading experience. All transactions are supported by this engine, therefore maximizing capital efficiency.

Thank you for your continued support!

Kine Protocol Team

2023–1–17

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For business cooperation, please contact prm@kine.io or marketing@kine.io.