Central limit order book-based exchanges, while common in centralized finance, can also be used in decentralized finance.
A central limit order book is a digital platform or system that facilitates trading financial instruments such as stocks, bonds, commodities or cryptocurrencies. It is a critical component of modern electronic trading and is used by financial exchanges, marketplaces, and trading venues to compare buy and sell orders from various market participants.
One key feature of a CLOB is that it provides transparency to the market. It allows traders to see the market’s current supply and demand levels, including the quantity and prices of buy and sell orders at different price levels. This transparency enables market participants to make informed trading decisions and assess the liquidity of a particular instrument.
Dexalot, for example, is a decentralized exchange based on Avalanche that employs a dCLOB. The platform includes a discovery tool that uses the dCLOB to generate an auction for a certain amount of time — usually 24 hours — in which matching is disabled, and all participants submit bids and offers. Chen continued, “Given the intense regulations that centralized exchanges are faced today, CLOB DEXs or decentralized CLOBs have a unique opportunity to get ahead by providing a trustless and permissionless environment. That said, a lack of regulatory requirements may also introduce barriers to adoption. It’s still too early for us to draw meaningful conclusions.”
The exchange may also manipulate the order book or prioritize certain orders over others. However, this also introduces opacity and reliance on trust in the exchange to act fairly and transparently. Technology may also be an advantage for CLOB DEXs in particular, according to Shan, who said, “Blockchain technology has advanced recently with innovations such as Avalanche subnets and custom virtual machines, which allow for far better speed and throughput and lower gas fees. We are seeing fully decentralized CLOB DEXs emerge that will significantly improve the DeFi space.”
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