Why did we choose a centralised order book as opposed to an Automated Market Maker?

While both protocols have their pros and cons, we believe a centralised orderbook (CLOB) as opposed to an automated market maker (AMM) best suit the problem we are trying to solve.

AMM

What is an AMM?

• AMMs allow digital assets to be traded in a permissionless and automatic way by using liquidity pools rather than a traditional market of buyers and sellers. AMM users supply liquidity pools with crypto tokens, whose prices are determined by a constant mathematical formula. Liquidity pools can be optimized for different purposes, and are proving to be an important instrument in the DeFi ecosystem.

Pros

• 24/7 availability of liquidity

• Instant matching

Cons

• Big slippages with small liquidity pools

• Liquidity fragmentation due to the number of options

• Deep liquidity pool might attract hacking risk

• No implied volatility (IV) discovery process

• Prone to be front run when sourcing externally for IV

• Capital inefficiency (idled/under-utilised liquidity pools)

CLOB

What is a CLOB?

• A central limit order book is an exchange-style execution method common in the equity world that matches all bids and offers according to price and time priority. It allows all users to trade with each other, instead of being intermediated by a dealer. Users can also see bid orders and sizes in real time.

Pros

• Widely accepted by professionals and retail

• Flexible to choose limit or market orders

• Promotion of a real IV discovery process

• IV formation

• Capital efficiency to serve large orders

• No risk for non-participating market participants

Cons

• Will not always match instantly, requires two parties with opposite risk profiles

• Requires professional market makers and liquidity providers onboard.