Position Exchange

<p><a href="https://www.coinbase.com/learn/crypto-basics/what-is-a-dex" rel="noopener noreferrer nofollow">Decentralized exchanges (DEXs)</a> have emerged and evolved over the past few years to provide a solution to issues that have long plagued centralized exchanges (CEXs) including hacks, lack of privacy, deposit limits, intermediary issues, and high fees.</p><p>DEXs also presents a unique opportunity with regard to the trade execution model. The two most prominent models of exchange design often center around the order book model and the automated market maker (AMM). This article will provide a breakdown of both of these trade execution models and explain the key differences that can impact trading experiences.</p><h2 id="header-0"><strong>Orderbook</strong></h2><img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/5b874ceada55421086654b8c09f2791e.png"><p>The term “<a href="https://corporatefinanceinstitute.com/resources/wealth-management/order-book/" rel="noopener noreferrer nofollow">order books</a>” explains the concept itself when it lists all the orders from buyers and sellers for each kind of cryptocurrency. In an order book system, a buying order is called a bid, and a selling order is an ask. When buyers upload their orders in DEXs, the order book is in charge of organizing suitable sellers that have related-price orders. Thus, DEX traders can do trading activities successfully when their orders are matched with other traders’ orders.</p><p>There are 2 types of orders in the order book: market order and limit order. When choosing a market order, traders can buy or sell for the best available price in DEXs promptly. It will match buyers and sellers with orders that are at the top of the book at that time. Meanwhile, when putting a limit order, traders choose expected prices and set the number of cryptos for buying or selling. The order will sit on the order book until a DEX system finds a suitable order and automatically matches it with yours.</p><h2 id="header-1"><strong>AMM</strong></h2><img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/ae904f99c2a543859ec700f47615e20f.png"><p>Liquidity is one of the most prominent barriers in DEXs. Even though tokens are difficult to exchange efficiently, AMM designs come in handy in solving this problem. Unlike an order book that specifies prices at which buyers and sellers wish to trade, an AMM exchange aggregates liquidity for both sides of a trading pair into a pool. The AMM pool then determines a single market price according to a deterministic algorithm. The price formula is usually based on the pool’s current liquidity, or in other words the availability of an asset in the pool.</p><p>AMMs do not require market makers, but rather heavily rely on liquidity providers to join the pool and expand its size to ensure that tokens reflect a fair price.</p><p>Various AMM DEXs use different mathematical formulas to quote prices for their liquidity pools. Let us consider the XYK formula pioneered by the Position exchange as an example. The price was calculated based on the ratio of the two assets in the pool as follows:</p><p>x*y=k (constant)</p><p>The constant “k” represents the total token balances in a liquidity pool that determine the token prices, x, and y at a given time. Let us assume that x = BNB and y = POSI. Each time users buy BNB, the price of BNB increases as the quantity of BNB in the pool decreases. Conversely, the price of POSI decreases as the number of POSI increases. Liquidity pools often provide arbitrage opportunities that can be exploited for profit.</p><p>Let us assume that 1 BNB = 100 POSI at the time of the trade via a pool that has 10 BNB and 1000 POSI. If a trader wants to buy 2 BNB, they would need to swap 200 POSI for 2 BNB, leaving the pool with 8 BNB and 1200 POSI. The price of BNB is now 150 POSI causing impermanent losses (temporary losses of funds) for liquidity providers.</p><p>BNB = 1200/8 = 150 POSI</p><img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/9f1e0ff799b445328b1d51dcde8642a7.png"><p>It is important to highlight arbitrage as a stabilizing mechanism, which incentivises traders to push the price determined by the AMM exchange closer to the spot price present in other exchanges.&nbsp; Expanding upon the example above, arbitrageurs can exploit this vulnerability and buy 2 BNB from a different market for a fair price of 200 POSI and sell them for 300 POSI in this liquidity pool. This would bring the price level of 1 BNB back to 100 POSI.</p><h2 id="header-2"><strong>Compare Orderbook model and AMM model</strong></h2><img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/34cd3f0aa90f4084bc76c3e338be5368.png"><h2 id="header-3"><strong>POSITION EXCHANGE - DEX 2.0</strong></h2><img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/e9dfbf1b9e294c279f90ec6201975bc2.png"><p><a href="https://position.exchange/?utm_source=coinmarketcapcom&amp;utm_medium=article" rel="noopener noreferrer nofollow">Position Exchange</a> is an EVM decentralized exchange that uses combinably AMM and Orderbook models. This combination helps to lower slippage and bring better prices to users, thus they can gain more profit.</p><p>With the orderbook and AMM model, users can not only trade with limit order but also can stake into <a href="https://position.exchange/?utm_source=coinmarketcapcom&amp;utm_medium=article" rel="noopener noreferrer nofollow">Farms</a><strong></strong>to enhance their earnings. Moreover, they can receive their share of the transaction fee when they wish to pull their money out of the pool.</p><p>In Position Exchange, users are custodians of their funds. It is trustless and permissionless. Therefore, no party can interfere with your funds.</p><h2 id="header-4"><strong>Summary</strong></h2><p>Automated market makers (AMM) are one of the biggest innovations in decentralized finance. Without functioning AMMs, decentralized exchanges wouldn't be possible, and crypto traders would still be forced into relying on intermediaries and central exchanges. The combination of AMM and orderbook model on Position Exchange creates the most convenient experience for EVM blockchain users. There is no EVM blockchain but Position Exchange can run on Orderbook model. Trading on <a href="https://position.exchange/?utm_source=coinmarketcapcom&amp;utm_medium=article" rel="noopener noreferrer nofollow">Position Exchange</a> comes up with countless benefits and advantages. It is worth trying accessing to <a href="https://position.exchange/?utm_source=coinmarketcapcom&amp;utm_medium=article" rel="noopener noreferrer nofollow">Position Exchange</a> to learn more details.</p>

Understanding DeFi Exchanges: Orderbook Vs. AMM

Table of Contents

PositionExchange

Other articles published on Oct 28, 2022

Making NFT trading cheaper with aggregation, collateralization & tokenization

What Are the Differences Between a Crypto Coin and a Crypto token?

Twitter is Developing Its Own Crypto Wallet

Halloween with Thunder Lands

Challenges of DeFi in 2022 and How Position Exchange Address Them

Become Choise.com Ambassador

Join our free newsletter for daily crypto updates!