No TVL — no problem.
Decentralized Finance (DeFi) is both a technological innovation and a cultural movement to transition traditional finance onto blockchains. Dexalot, a decentralized central limit order book (CLOB) trading system, has made its mission to contribute to the mass adoption of DeFi. Dexalot is on track to transform its exchange to a subnet blockchain, and because it is a CLOB built on Avalanche, it does not need to totally lock up large amounts of value (TVL).
The creation of DeFi trading systems and exchanges was at first highly problematic, because blockchain programming was initially creating systems with long times to finalize consensus processes. In the same regard, the mode of trading in traditional finance was largely through central limit order books which need short finalizing times to be competitive.
Defi innovators subsequently realized a way to automate the role of the traditional market maker of centralized CLOBS into simple swap systems. Enter AMMs. This solved some of the early growing pains that often accompany new technological developments. See this glossary for definitions of some of these terms.
In this early decentralized world as AMMs were beginning to rise in popularity, the gas and transaction fees were quite high. Since the market maker generally must send many transactions to make the market, it was hard for market makers across the board to be profitable.
AMMs have definitely added value to DeFi as a whole. There are no ifs, ands, or buts about it!
AMMs are built with liquidity pools of linked tokens. Liquidity pools enable the swapping of tokens, and thereby establish the trading functionality otherwise seen on traditional CLOBs as facilitated by market makers. Why are market makers needed? Because if buyers put only cryptocurrency prices in for, let’s say $95 dollars, and the sellers in the market only put in prices of $105… there may be a gap in which there are no fillable orders. Market makers step in this breach, and by sending several orders, remove the gap and allow trading to continue. This is how they “make” the market.
Order book depth chart.gif
Click on a date/time to view the file as it appeared at that time. The following other wikis use this file: Usage on…
Without market makers, the placement of bids and asks can result in an illiquid exchange as orders remain unfillable. Trading may actually cease when that condition persists. AMMs solved this concern in a new way and with single click functionality, DeFi trading became highly popular on AMMs.
Please see this video below to further understand how AMM liquidity pools work:
In the process of simulating the activity of the market maker in an AMM’s linked token design, slippage becomes more of an issue, and that results in permanent impermanent losses as the overall market evolves. This loss of value can be minimized by increasing the amount of liquidity in each trading pool, and thus AMMs have the tendency to increase the total value locked. To learn more about this loss please see this video:
While AMM developers were busy increasing the interest in and popularizing DeFi, Ava Labs (with its introduction of Avalanche), managed to solve the bugbear that had hounded DeFi trading systems and had led in part to the introduction of AMMs to begin with — long finalization times.
Ava Labs offered the community a totally new form of consensus to establish an internet of finance via a specific, composable blockchain architectural design: subnets. The Avalanche “platform of platforms” results in a highly scalable system with near-instant finality. Now that Avalanche has created the means to build blockchains that are blazingly fast, it is possible to create new decentralized trading systems that rival the legacy look and feel of traditional CLOBS. While maintaining a traditional look and feel, subnets possess all of the strengths and benefits that accrue to the decentralization ethos, guiding both the development of AMMs, and the internet of finance’s interoperability.
Dexalot, the first decentralized central limit order book built on Avalanche does not need a very large amount of value locked on the exchange in order to offer a quality trading experience. Thus while total value locked is important for AMMs to accumulate it is not necessary at all for decentralized CLOBs such as Dexalot. No TVL? No problem!
CLOBS do not need individual users to supply liquidity. Instead, like traditional exchanges, they just need to have market makers keep the spread narrow. Now that Avalanche has created subnets (where transaction fees can be very low), it is possible to incentivize market makers on decentralized systems without breaking the bank.
So, for Dexalot (which has the advantage of fast Avalanche finality), it is possible to build that traditional look and feel of centralized exchanges with market makers incentivized without having to lock up more and more money as is happening on AMMS. Users can trade as they see fit without regard to the incentivization provided to market makers.
Dexalot strives to create an environment where the price you are going to get is the best price, your price.
You can see an example of how Dexalot’s market makers keep the price close to the market by looking at the ALOT/AVAX pair. Dexalot’s ALOT token went through Dexalot Discovery and came out of auction at a fairly close price to that established during discovery without any huge upswing. It is the purpose of Dexalot’s discovery process to prevent bots from taking retail traders’ trades and causing such upswing price manipulation.
Dexalot has begun to implement the Dexalot Subnet, and market makers are being offered access so that they can test it and determine how to best construct Dexalot’s subnet market.
Given that subnets can incentivize market making with low fees it is also possible for subnets to incentivize users with a portion of the trading volume. Dexalot has announced this will be possible for stakers who #Stake2theSubnet.
The more users and projects realize this ethos and value of CLOBs, the advantage of having a subnet Avalanche CLOB, and the particular innovation and incentivizations offered by Dexalot, the sooner we will see a more sane market.
Writer: Brad McFall
Editor: Dan Marcoulis
Graphics: Can Toygar
Dexalot is a revolutionary decentralized exchange aiming at bringing the traditional centralized exchange look and feel to a decentralized on-chain application. Its mission is to bring a truly inclusive and transparent environment where Dexalot users can trade crypto securely and efficiently, with no slippage or custody risk. It is built on Avalanche, the fastest smart contracts platform in the blockchain industry.