Doing More With Less
Capital Efficiency Explained
Despite its popularity, Total Value Locked (TVL) is an arbitrary metric for evaluating protocol adoption and economic activity. Truly capital-efficient markets match supply to demand within a small margin, meeting the utmost requirement to facilitate trade while minimizing opportunity costs. Simply put, capital efficiency refers to how much capital is required to produce a given amount of output, and in a spot trading sense — Volume.
Due to the original constraints of networking scalability and cost, Decentralized Finance protocols were forced to sacrifice capital efficiency in their designs — One of the most common and well-adopted protocol designs was the Uniswap V2 AMM, which utilizes liquidity pools to simply aggregate trading pair liquidity and facilitate trades at any price using on a constant product curve (x*y=k).
The problem with the Uniswap V2 design is that by always offering liquidity at any price, the protocol greatly sacrifices capital efficiency given a large majority of the funds providing liquidity are not being utilized to facilitate trade — thus the yield earned for providing liquidity is greatly diminished.
The advent of scalable, low latency, and low-fee networks, such as Aptos, enables an environment that no longer depends on rudimentary application design to facilitate trade. Aptos enables the the fully on-chain central limit order book (CLOB), such as Econia.
Central Limit Order Books are not new financial primitives, in fact, you more than likely used one when purchasing crypto for the first time, and they’re the defacto trading infrastructure for much of traditional financial markets. Fully on-chain CLOBs differ from AMMs because they enable users to strategically place bids and asks as close as they wish to the mid-price within a small margin. Simply put, utilizing a CLOB allows traders to be far more exact for which price they wish to make or facilitate trade.
Let’s visualize just how more capital efficient an on-chain CLOB is compared to a traditional AMM by comparing Econia data vs the rest of the Aptos dex market.
Comparing The Capital Efficiency of Econia vs Leading Aptos AMMs
AMM DEXs currently lead a majority of the time by trading volume within the Aptos Ecosystem. Additionally, APT-lzUSDC pools lead all pools by TVL, yet these pools struggle with capital efficiency when compared to the DEX offering of Econia.
Below is an example explaining the numbers derived from market metrics on March 20th:
- Leading AMM APT-lzUSDC Liquidity: $10.00mm
- Leading AMM APT-lzUSDC 24hr Trading Volume: $5.00mm
- Capital Efficiency = Trading Volume / Liquidity
- Leading AMM Capital Efficiency Ratio: 0.5
Now let’s dive into Econia’s market metrics for APT-lzUSDC:
- Econia APT-lzUSDC Liquidity: $145k
- Econia APT-lzUSDC 24hr Trading Volume: $4.34mm
- Capital Efficiency = Trading Volume / Liquidity
- Econia Capital Efficiency Ratio: 29.9
To simply explain these numbers above, and assuming trade slippage is highly similar or equal:
- For every dollar of liquidity deposited into the leading Aptos AMM liquidity pool, $0.50 of trading volume is taking place.
- For every dollar of liquidity present on the Econia order book, $29.90 of trading volume is taking place.
- Econia requires significantly far less capital to facilitate relatively similar trading volume compared to the leading AMM given liquidity is dynamically and competitively placed near the fair market price of APT, while AMM liquidity is not.
Now you might be thinking, but how competitive are the two DEXs in terms of price impact, we’ve provided some live market data examples to show that a large majority of the time, Econia is more competitive:
To see Econia’s pricing competitiveness in real-time, you can play around with the Panora trade aggregator — a product that sources the best price of the asset you wish to trade across all Aptos DEX markets, utilizing smart order routing to reduce price impact.
Conclusion
The central limit order book, such as Econia, is the premier DeFi primitive for enabling efficient capital markets on Aptos. Magnitudes of less capital are required to enable the same ease of trading with competitive prices. Additionally, Econia institutional integrators can leverage industry-standard APIs and SDKs to access the order book and trade.
