ELI5: What is RFQ (Request for Quote)
TLDR
RFQ (Request for Quote) is when a buyer asks several sellers to provide their best price for the thing they want to buy.
What is RFQ
RFQ (Request for Quote) is when a buyer asks several sellers to provide their best price for the thing they want to buy.
RFQ is not a crypto concept, instead it is a mechanism used in various markets like finance and procurement.
Imagine you want to buy a big batch of chairs for your office, instead of just going to a store and accepting whatever price they offer, you decide to ask for a better deal.
The analogy for a 5yo (literally ELI5)
Imagine you are a kid in school and you have a box of crayons, you want to draw a huge picture but you realise you need more crayons to make it colourful. You decided to ask some of your friends if they can lend you some crayons.
You go to your friend Alan and ask, “Alan, can you lend me some crayons? How many can you lend, and what colours do you have?” Then you go to your friend Bobby and ask him the same thing.
Alan says he can lend you 10 crayons, and Bobby says he can lend you 15 crayons.
Now you think about who to borrow from and you decide to borrow from Bobby because he can give you more crayons. This is like asking for a quote.
In real world, when people or companies need to buy or sell something big or important, they ask different people or companies how much they will charge or what they can offer. This is called making a “Request for Quote.” They get different answers and choose the best one, which helps them make sure they get a good deal.
How RFQ works
1. Ask for Prices
You reach out to several sellers of the item you want to buy. You tell them:
- what you need
- how much you need
- other details (eg. delivery times or specific models)
In the financial markets, this means you contact different brokers or financial services to tell them you want to buy or sell a large quantity of a stock, bond, or cryptocurrency.
2. Receiving Quotes
The sellers respond to your request by giving you a “quote.” This quote will usually include the price they are willing to sell you the item for, and other terms like delivery time and payment terms.
In finance, the quote will specify the price at which the broker is willing to buy or sell the financial asset for you.
3. Review and Decide
You review and compare all the quotes you’ve received from different sellers and decide which seller offers the best deal for what you need.
In financial trading, you would choose the broker who offers the best price and perhaps other favourable conditions (like speed of execution or transaction fees).
RFQ in Crypto Trading
In the realm of crypto trading, RFQ system offers a distinctive alternative to traditional liquidity pool-based trading systems predominantly managed by Automated Market Makers (AMMs).
For instance, RFQ based DEXs can enhance price stability provided by Professional Market Makers (PMMs) rather than relying on liquidity pools that can be subject to significant price fluctuations and vulnerabilities like sandwich attacks.
RFQ systems enables a more secure trading environment where quotes are provided before the trade is executed, thus allowing users to avoid price manipulation.
Benefits of RFQ
How RFQ can be used in Defi protocols like DEXs vary based on the specific implementation of the RFQ system by the protocol.
One potential benefit may be reduced slippage.
On typical DEXs, you may encounter “Price Impact” or “Slippage” estimates in the interface, predicting how your trade may be impacted upon initiation. With RFQ, your trade is executed at the quoted price, which remains unchanged once the transaction is initiated.
Apart from that, using an RFQ system is a bit like dealing directly and privately with a shop for a specific item at a fixed price, rather than shouting your shopping list in a busy marketplace where others might overhear and interfere. This direct and discreet method naturally reduces the risk of others manipulating or taking advantage of your transaction, hence reducing the likelihood of MEV attacks.
Summary
As the cryptocurrency market continues to mature, the adoption of sophisticated trading mechanisms like RFQ could play a pivotal role in enhancing trade execution, providing market stability, and ensuring competitive and fair pricing.
neko x
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