From AMMs to CLOBs: why CLOBs matter for onchain TradFi capital
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TL;DR of A1's CLOB campaign intro: AMMs solved slow chains but suffer slippage and capital inefficiency, cannot serve the larger perp market, while CLOBs give price discovery and order types institutions need and are now feasible onchain.
Key claims
A trade worth 10% of pool liquidity causes over 11% slippage
Perps market is 3-5x larger than spot
CLOBs are the bedrock of TradFi and centralized exchanges
CLOB season is upon us, ushering in a new DeFi era.
That's why with @a1research__ we have kickstarted our CLOB campaign today (see comments for full plan).
But why do CLOBs matter, how do they compare to AMMs, and why will they be a crucial enabler to onboard trillions of tokenized assets & TradFi capital?
The answer to that can be found in our intro article linked below.
Quick TL;DR ↓
- DeFi infra is evolving from AMMs to CLOBs in order to successfully support trillions of institutional capital and finally compete with CEXes and TradFi exchanges at scale.
- Automated Market Makers (AMMs) were a crucial innovation that solved the problem of trading on slow, high-fee blockchains, but cannot support the requirements of institutional capital.
- AMM Mechanics are based on a mathematical formula (e.g., Uniswap's x×y=k), causing price to be determined by a liquidity pool's ratio, not active buy/sell orders.
- The critical flaw in that system is slippage. Its algorithmic pricing is inefficient for large trades, with a trade worth just 10% of a pool's liquidity causing over 11% slippage.
- AMMs are suffering under capital Inefficiency. Most AMMs spread liquidity thinly across all possible prices, leading to poor capital use and exposing providers to impermanent loss.
- The AMM model proved unsuitable for the perpetuals market (which is 3-5x larger than spot) because it lacks the precision needed for liquidations, leverage, and risk management.
- CLOBs are the missing TradFi standard. They are the bedrock of all TradFi markets and centralized crypto exchanges, matching orders with price-time priority at a scale that can't be replicated on AMMs
- This design provides true price discovery, high capital efficiency, and natively supports essential tools/features like limit and stop-loss orders that any professional/institutional trader demands.
- Verifiable/onchain CLOBs are now technologically feasible due to high-throughput L1s, opinionated appchain designs, and generally a rapid maturation of the infra stack (DA layers, ZK infra, oracles, etc).
- This marks a critical inflection point for the DeFi industry, but the shift is not a total replacement of all AMMs. However, it is a crucial evolution that enables the institutional-grade infrastructure required for DeFi to become a full-scale financial system able to support trillions in TradFi assets.
You are not bullish enough anon.
Make sure to check out the full article below! ↓
@a1research__ Full campaign plan can be found here ↓
x.com/a1research__/status/1971634912798323015
QUOTING @a1research__
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