Quote-driven markets and DEUS DeFIX. The perfect match.
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DEUS aims to bridge the worlds of traditional finance (TradFi) and DeFi. This will be achieved via the DEUS DeFIX (decentralized financial information exchange protocol), a request for quotation (RFQ) derivatives clearinghouse with bilateral clearing. DeFIX was designed for third-party exchanges to build on top of, and for traders and market makers to leverage. Learn more via the DEUS whitepaper.
This article outlines why DeFIX was designed as a quote-driven clearinghouse vs the common order-driven variant that most exchanges adopt. In short, quote-based systems enable sophisticated trading & margin features, higher liquidity, and high on-chain scalability when compared to order-based counterparts such as dYdX, Perpetual protocol, GMX, and others.
Understanding the difference between quote and order-driven markets
Order-driven markets display all bids & asks (which create the bid/ask spread) on a public order book, while quote-driven markets display RFQs that traders put on-chain for market makers to monitor and fill. Learn more about the differences.
Order-driven markets
Below is an example of how the bid/ask spread affects price and functions within an order-based system.
Disadvantages of order-driven markets
- Requires high-frequency updates that struggle to scale on blockchains.
- Tedious for market makers to manage a large asset universe on multiple order books.
- Order flow is often restricted to market makers by exchanges.
- Low-volume assets commonly suffer from high slippage/thin liquidity.
- Liquidity is sharded between multiple order books.
Quote-driven markets
Below is a simplified example of how a trader creates an on-chain RFQ on DeFIX for market makers to monitor and fill.
Advantages of quote-driven markets
- Highly scalable on blockchains.
- Managing a portfolio of market maker positions is a seamless experience with automated hedging and position management.
- Enables a free market with unrestricted market access.
- Deep liquidity and no slippage.
- Liquidity is provided on demand.
- Large and scalable tradable universe.
The issues that quote-driven derivative markets face
With the advantages that quote-driven derivatives markets have, current implementations of this market structure are far from perfect. As of now, if an entity wants to create a derivative RFQ in the TradFi markets, the barrier to doing this is exceptionally high. The following requirements must be met to access these markets:
- You typically need to be a trader at a bank or a large hedge fund.
- You must have a signed ISDA agreement.
- A team of lawyers is required to manage the contract.
- And finally, you must find a willing counterparty that agrees to take the countertrade.
Quote-driven markets reimagined with DeFIX
DEUS does not simply implement standard versions of TradFi RFQ derivatives. DEUS’s decentralized, digitized, and automated implementation of RFQ derivatives will sidestep all the issues listed above. Via DeFIX, a new market structure with unparalleled capital efficiency and trading features will be presented to the global financial markets. This is made possible by enabling parties to place on-chain RFQs that are accessible to the free on-chain market. The theory sounds simple, however, DeFIX is a complex system that has numerous innovations (as outlined in the DEUS whitepaper) that synergize to make this possible. These innovations include partial filling, CVA buybacks, Muon-based verification, master agreement ranking structures, and more.
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