DLOB

VDEX's Decentral-Limit Orderbook

Highlights

Compared to AMMs, DLOB offers

• better order execution for traders

  • less price impact

  • higher liquidity

• higher yield for liquidity providers

  • no impermanent loss

• more trading pairs

Compared to CLOB, DLOB offers

• full self-custody

• self-verified transactions

Orderbooks and AMMs Explained

First, let us compare orderbooks in general to AMMs. AMMs work by liquidity providers depositing a pool of two assets, creating a trading pair. Traders can then exchange the assets against each other utilizing the existing liquidity in the pools. The exchange rate is determined based on an algorithm called a bonding curve. If many traders are depositing asset A in exchange for asset B, there will exist more of asset A in the pool than asset B. The curve will interpret a higher demand for asset B, resulting in a higher price for B in relation to A.

Orderbooks work differently. Instead of pools, orderbooks list bids and asks from lowest to highest. If a user wishes to sell, they will be matched with a bid order. If they wish to buy, their order is executed against an ask. The existing bids and asks are not supplied at inception, but must be created and maintained by active traders called market markers. VDEX users can get involved in market making directly by trading with 2% daily rebates, or by liquidity providing to the VDEX Vault with 30% APY.

Market Making

VDEX Vault

Orderbook vs. AMM

While AMMs are easier to maintain through preexisting liquidity, their advantages largely stop there. Orderbooks are more capital efficient, and thus provide better prices and order execution to traders and higher yield to LPs. Instead of depositing thousands of dollars into pools that cannot be easily withdraw or moved, market makers can hold funds in Bitcoin or USD and add and withdraw orders as needed to different pairs. Additionally, they can do so with leverage in perp orderbooks.

So, the cost of providing liquidity for 1 BTC-USDT is $120,000 in an AMM (1 BTC + $60,000), but it could be as little as $3,000 in an orderbook. This is with 20x leverage and the orderbook's advantage that only one side of the trade must be provided at a time. Thus, this orderbook can be considered 40 times as efficient.

Due to this increased liquidity, traders experience less of a price impact, meaning they receive a higher average sale price and lower than average buy price in orderbooks compared to AMMs.

Finally, liquidity providers also benefit as the increased flexibility removes impermeant losses. Impermeant losses occur often with AMMs because traders will withdraw the popular token in exchange for the less popular token that they are selling. This leaves the LP with less of the popular token and more of the less popular token. Because the popular token is likely to have increased in price, and the less popular token has decreased in price, the LP will experience a loss.

In conclusion, orderbooks are more difficult for the exchange to maintain, but are preferred by the trader and liquidity provider.

DLOB vs. CLOB

Unlike most decentralized exchanges, VDEX operates on orderbook. Similar to central-limit order books (CLOB), VDEX operates a decentral-limit orderbook. This is mostly a playful pun, as the "central" in CLOB does not refer to centralization, but how orders come to one central buying point. Still, VDEX's DLOB represents significant advantages over CLOBs.

The main difference between DLOB and CLOB is apparent through the name: decentralization. Whereas CLOBs traders must trust the exchange to execute their orders properly, DLOB traders participate in the execution of their own orders.

This is also significant because of the prevalence of AMMs in cryptocurrency largely relates to regulatory compliance. It is illegal for exchanges to operate without a license unless they never hold custody, control, or power of users funds. AMMs meet this strict definition and it is the reason why DEXes like Uniswap can serve US customers.

CLOBs do not meet this definition because the exchanges must hold custody of user funds. DLOB is the first orderbook to not hold custody of user funds. This is beneficial not only from the compliance perspective, but also because VDEX actually adheres to the crypto principles of self-custody and trustlessness, unlike CLOBs which run on CEXes or centralized L1s.

	DLOB	CLOB	AMM
Capital Efficient	Yes	Yes	No
Price Impact	Low	Low	High
Impermanent Loss	No	No	Yes
Trustless Execution	Yes	No	Yes
Regulatory Compliant	Yes	No	Yes