Wtf is RFQ on-chain?

The most common ways in which users trade in Decentralized Finance (DeFi) are on Decentralized Exchanges (DEXes) and DEX aggregators which leverage automated market makers (AMMs) to source liquidity. But there are better ways. Bebop follows an RFQ on-chain model.

In this post, we will explain how RFQ on-chain works and the benefits of trading using this model versus a traditional AMM model.

Intro to RFQ

The financial markets love their acronyms. We’ve had our fair share of confusion navigating the jargon ourselves. However, to explain RFQ, we will begin with OTC.

You’ll often hear about RFQ in conjunction with OTC trading, which merely stands for over-the-counter (OTC) trading. In finance, OTC refers to financial transactions that occur outside of formal exchanges, such as stock exchanges. Just like over-the-counter medication removes the need for a patient to go to a hospital for a prescription, OTC trading removes reliance on a central exchange to match buyers and sellers. In OTC trading, transactions occur directly between two parties at an agreed-upon price. Simple as that.

RFQ is a type of trading that is quote-driven — the acronym representing “Request for Quote”. With RFQ, a buyer or seller requests quotes from one or multiple sources in order to find the best price for a specific product or service. The buyer or seller may then choose to purchase the asset from the maker that offers the best price. This can be an OTC transaction, in which the buyer or seller will interact with the market maker directly, or conducted in a formal exchange that handles the RFQ process for both parties. OTC and RFQ are not unique to crypto. In fact, RFQ is quite prominent in traditional financial markets.

RFQ on-chain

What is new is that, with the development of blockchain technology, RFQs can be conducted directly on a blockchain. This allows for the submission of RFQ orders and the matching of these orders on-chain, rather than on a centralized venue or exchange.

You may be wondering how this is different from trading on a traditional DEX. Most decentralized exchanges source liquidity from automated market makers (AMMs) with liquidity pools that anyone can contribute to. Bebop does not offer this at this time.

We’ve taken a stab at outlining the differences between a traditional AMM model and RFQ on-chain below:

So what does this mean? What are the benefits? I think we can sum up the three largest benefits of trading RFQ on-chain as follows:

• No unpredictable slippage (aka guaranteed prices): On decentralized exchanges with slippage, you will see “Price Impact” or “Slippage” quoted in the interface — this is a prediction for how your order (and others) will impact the asset’s price and thus how your trade may be impacted as it is initiated. With RFQ on-chain, your trade is executed at the price quoted and it does not change once the transaction is initiated. Learn more about this here.
• Gas included in the quote: On a traditional DEX, gas will typically not be included in the trade you are initiating. This means that when you submit the order, you will need to have the native blockchain token (such as ETH or MATIC) to pay for the transaction being placed. This isn’t free on Bebop, but your gas is included in the quote in the token that you are paying. The only need you will have for a native token is for translation approvals. Learn more about this here.
• MEV protection: Because transactions on-chain are public, and validators have a holistic view of the transactions, trades are often subject to attacks by Miner Extractable Value (MEV) bots. We will release a separate blog post on this soon.

How does Bebop work?

Would you consider Bebop a decentralized exchange (DEX)? Well, we’ve said it before and we’ll say it again — there is a general lack of consistent definitions in this industry. Technically, a DEX is an exchange that operates on a decentralized network, enabling users to trade without needing intermediaries like centralized exchanges. Check. This also means that the platform operates through smart contracts, with users retaining full control of their funds at all times. Double Check. So, according to this definition, Bebop is a DEX.

At Bebop, we provide all of the benefits of DEXes — we’re permissionless, transparent, trustless — but there is more. Bebop is a decentralized exchange that sources liquidity from private market makers. So, in a way, you could call us a liquidity aggregator.

How does this work exactly? Below, we’ve created a visual for how the RFQ on-chain model operates with multiple private liquidity providers (also known as market makers).

Here is how it works:

Step 1: Quote request

First, the user would initiate a trade by requesting a quote on Bebop. This is done simply by the user adding the amount of each token that they wish to trade in the “You Pay” side of the trading screen.

Step 2: Market maker quotes

On Bebop, the quote for this trade will come directly from the market maker(s) providing liquidity on the exchange. These private market maker(s) are constantly streaming their pricing to Bebop and the best pricing for this trade will be displayed to the user in the “You Receive” side of the trading component.

Because this is an on-chain transaction, the quoted price will already include the cost of gas (network fees) for the transaction.

Step 3: Accepted quote

The user will then either accept or reject this quote. If the user accepts the quote, they will sign a message in their wallet to confirm the trade.

The user may of course also decline the quote on Bebop, after which they would likely either end the trade here or wait for a more optimal offer.

Step 4: Settlement contract

Bebop sends the transaction on-chain and the smart contract settles the trade without Bebop EVER taking custody of the user’s funds.

This part is important to understand because it explains that we do not hold custody of any user funds. Period. Our smart contract simply allows for the trade to occur, at the agreed-upon price, between the user and the liquidity provider.

Try it out on Bebop

Bebop is open and available for trading on Ethereum, Polygon, and Arbitrum. Check out how RFQ works on-chain and how you can benefit from trading on Bebop.

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