Limit Orders: The Most Overlooked Missing Function on DEXs

Decentralized exchanges (DEXs) have recently been thrust into the limelight in the cryptocurrency industry, owing to their increased popularity in the so-called decentralized finance (DeFi) sector, that is, the amalgamation of blockchain protocols and networks that allow people to interact directly with financial products and services.

Thanks to DEXs, people can now buy and sell cryptocurrency to each other without the need for intermediaries, with smart contracts automatically fulfilling their orders at the desired price and amount.

The majority of DEXs today also differ from the very first DEXs that were introduced between 2014 and 2016. Early versions of crypto DEXs applied an order book format much like what you’d find on a centralized exchange (CEX), lining up buy and sell orders from users, matching traders, and settling the trades. This created a liquidity issue — without enough people or enough assets filling up the order books, DEXs were unable to match the depths of liquidity on CEXs, leading to low adoption rates.

Implications of Leaving Out Limit Orders

Modern DEXs run on automated market maker (AMM) protocols, doing away with order books and providing liquidity via pools of trading pairs. Anyone is able to contribute their assets to these liquidity pools; these liquidity providers are incentivized to do so by sharing portions of the fees and commissions generated by every swap made in the pool.

It’s a model that has seen great success over the past two years, with total value locked or TVL in DeFi (mainly through AMMs) breaching $45 billion in April 2021 (Defipulse).

But there is one important feature that these exchanges gave up along with order books and this continues to be one missing aspect that many AMM-style DEXs overlook: the ability to use Limit Orders.

There are two means of executing orders in a regular market.

On most centralized platforms using order books (and on early DEXs using order books), it was possible to use a type of order called the Limit Order. This allowed traders to set the maximum or minimum price at which they are willing to buy or sell their digital assets.

The second type of order is the market order which simply means that a buy or sell transaction will execute as quickly as possible, at whichever market price is currently available. This is the type of order that takes place at AMMs like Uniswap or SushiSwap.

Therein lie the problems.

First of all, this means that it’s the assurance of execution, rather than assurance of price, that is important in market orders. Should volatility hit during the time of swapping, then a swap could actually execute at a price very different from what was expected. Especially with low liquidity or low-volume pairs, swapping can result in high slippage and, therefore, a high price impact. AMM traders have a high likelihood of order execution but seldom are guaranteed exact amounts swapped, since price impact can be high.

Secondly, this means that DeFi traders can’t automate their trading. If there is, indeed, a desired price for entry or exit, they have to be constantly monitoring markets for these prices, and then making the swaps manually as soon as the market is right. Windows of opportunity are small in DeFi and this means traders need to constantly be at their terminals, ready to pounce on market prices as they come.

What if a DEX could do Limit Orders?

Ask any “regular” trader on a centralized platform how they conduct trades now and you might be surprised to find that they behave very differently from DeFi traders on AMMs.

1. While DeFi traders tend to be online at all times, at their DEX actively for most of their trading hours, the regular trader is spending his time researching.
2. DeFi traders also swap manually and often, while regular traders automate trades with bots, often setting their orders early and allowing them to fill — since most centralized platforms allow for Limit Orders, including Stop Loss functions.

But imagine if a DeFi trader on an AMM-style DEX could actually get the same option to enter Limit Orders and Stop Loss functions, just as they would normally expect on a centralized exchange?

A Limit Order would allow DeFi traders to get their swaps at desired prices by leaving instructions to fill buy or sell orders at specific prices (or better prices). For instance, if you think an asset is too expensive at the moment, or you are expecting prices to drop throughout the day, then you simply set a Limit Order to buy at a price below the current market price. How much lower is totally up to you.

A Stop Loss would allow traders to set a maximum allowable loss by activating a market order once a stop price has been met. For instance, if you are holding a token but you would definitely liquidate everything if it were to lose 50% of its value to limit your loss, then you simply need to set the lowest maximum price you would sell, and if the market price hits that, your assets are all sold.

This opens up a whole new world of possibilities previously unavailable to DeFi traders:

1. No more missed opportunities. How many times have you missed a trade because the price was only there for a few moments? In DeFi, in the time it takes you to connect your wallet, look up the pool, and enter in your gas costs, the price could very well move out of your desired range. Limit Orders would automatically fill your order the moment your price range hits.
2. No more stressful always-on monitoring. Even with a DEX aggregator like PlasmaFinance, you still need to watch many networks. Keeping an eye simultaneously on SushiSwap, Uniswap, Pancakeswap, etc… it’s impossible to maintain without worrying and stressing. Using Limit Orders across all the connected platforms means automatic swaps as and when the price is right.
3. No unplanned losses, less price impact. We’ve all been there before. We’re approving a swap and as it settles, we suddenly see slippage spike, and then we buy tokens at a price far higher than they were just seconds ago. With Limit Orders, you get orders filled only at the price range you want. With Stop Losses, you don’t have to worry about price tanking to zero overnight.
4. More hours to live your life. When DeFi traders sleep, they stop making swaps. But with Limit Orders, you can leave your computer, walk your dog, go to bed, live your life. Your swaps will still happen, at the prices you want.
5. A friendlier environment for institutional trading.

Limit Orders Coming to PlasmaSwap

It’s a longstanding complaint among DeFi traders but we hear you. This is why we’ve been working so hard behind the scenes to deliver Limit Order capabilities to PlasmaSwap. Not an integration, not a second layer, but native Limit Order functions.

And just like a regular trading platform for forex, you don’t even need to know how it works. You just need to know it works.

We can’t wait to change your life.