Dfyn V 2.0 Introduces On-Chain Limit Orders
It wasn’t long ago that the exchanges that dominated the crypto trading landscape were completely centralised, controlled by a single entity, and often plagued by security breaches, fraud, and market manipulation.
But then came the rise of decentralised exchanges (DEXs). Built on a decentralised architecture, they started enabling peer-to-peer transactions that were transparent, secure, and censorship-resistant. With DEXs, users finally had complete control over their assets, eliminating the need for intermediaries and enabling true financial freedom. Moreover, DEXs provided greater privacy, as they didn’t require users to disclose their personal information or undergo time-consuming KYC procedures.
However, despite their peerless benefits, most DEXs still operate with certain centralised elements.
For example, many DEXs often rely on order books that are hosted off-chain, meaning that they are susceptible to censorship, manipulation, and downtime.
Such elements undermine the core values of decentralisation and limit the potential of DEXs to create a truly decentralised financial system. With Dfyn V 2.0, we are taking a bold step to remove such points of centralisation by introducing On Chain Limit Orders.
But first, let’s understand what limit orders are.
What is a Limit Order?
A limit order is a trade where a user specifies constraints on the state of the market in which they want to execute the trade. There are two main types of limit orders that involve price constraints:
Buy Limit: This occurs when the price fulfils the condition (Limit Price) <= (Highest selling price).
Sell Limit: This occurs when the price fulfils the condition (Limit Price >= Highest selling price).
First-generation DEXs used Centralized Limit Order Books (CLOBs), where they utilised Web 2.0 services to maintain an order book where buy and sell orders can be matched via sorting algorithms in real-time.
Decentralised Limit Order Books (DLOBs)
However, since DEXes no longer rely on the concept of Automated Market Makers (AMMs) to create pools of assets, they have started leveraging smart contract innovations to decentralise the process of placing a limit order using Decentralized Limit Order Books (DLOBs)
Having said that, existing DEXs place these orders off-chain, where the orders are placed either on or off the exchange, but the trigger to execute the trades occurs off the exchange. As the price inches closer to the target price of the limit order on an exchange, attempts are made by external entities to place the trade at that price.
This mechanism has multiple limitations like:
Not Automated:
Although christened as ‘Limit Orders’, such trades resemble ‘Market Orders’ because trade at the limit price is not executed via an automated mechanism of the exchange but through an external interjection.
Lack of transparency
Although the trade occurs on the chain, orders are aggregated on off-chain nodes, due to which limit order data is shrouded from scrutiny.
Failure to execute orders
In any DEX, trade is dependent on liquidity providers; the price supported by the liquidity of the exchange is the price of the asset per unit. Therefore,
If an order for a large quantity is placed, it will cause fluctuations in liquidity, leading to a shift in price away from the limit order price that the trade was fixed for. This might lead to partial fill or denial of execution of the trade.
Third-Party Dependence:
Off-chain limit order DEXes have a high dependency on third parties, such as graph or indexing servers, to identify newly placed orders which will then be executed by bots.
Delayed Triggers:
The dynamism of the environment coupled with the inefficiency of the bots used to execute trade can lead to failure in realising the limit order price.
Not Economically Favourable for Traders:
DEXes offering off-chain limit orders pocket any difference between the limit order price and the actual market price, which in principle, should belong to the traders. Take, for example, a trade where the limit order was at a price of $10.
If the price realised after the trade is $12 (a profit of $2), the resulting difference between the limit price and the realised price is pocketed by the exchange.
This creates a scenario where the Exchange enjoys profit from slippage at the cost of the trader.
Decrease the value of the ecosystem
Off-Chain Limit orders act as traders that squeeze the liquidity instead of market makers that add to it.
As a measure to resolve these pain points and introduce complete decentralisation in the process of placing Limit Orders, we are proud to introduce On Chain Limit Orders on Dfyn V 2.0.
What are On-Chain Limit Orders?
On-chain limit orders are orders placed on a blockchain that specify the maximum or minimum price at which a user is willing to buy or sell a particular asset. These orders are executed automatically when the market price of the asset reaches the specified price, allowing users to trade assets without the need for a third-party intermediary.
They provide a convenient way for users to trade assets in a trustless and transparent manner without having to rely on a central authority to match buyers and sellers. With On Chain Limit Orders, the question of successful execution of every order is not “if” but “when”.
To execute this offering, we have created limit order ticks.
Limit Order Ticks:
In the past, traditional tick logic imposed limitations on our ability to distribute liquidity within a range. However, through recent innovations, Dfyn V2’s AMM has introduced “Limit Order Ticks,” which allow for highly concentrated liquidity on a single tick, resulting in enhanced price precision. This enables users to add liquidity at a precise price, similar to how order book exchanges operate.
If you want to understand what a Tick is and how they are embedded in our concentrated liquidity curve, then check out this blog.
Benefits of On-Chain Limit Orders:
There are several potential benefits to using on-chain limit orders:
Automation:
On-chain limit orders are executed automatically when the market price reaches the specified price, allowing for seamless and efficient trading without the need for a third-party intermediary.
Assurance :
With our limit liquidity being embedded on the curve itself, when the price passes a certain price point limit order at that point is bound to get filled. Without exhausting the limit order liquidity at that price point, the market price will not go further. Hence giving an assurance of order fill.
Transparency:
Because on-chain limit orders are executed on a blockchain, they provide a transparent and verifiable record of all trades. This can help to build trust and confidence in the market.
Security:
On-chain limit orders are facilitated by smart contracts, which provide a secure and tamper-proof way of executing trades. This reduces the risk of fraud and ensures that users retain control over their assets at all times.
Cost savings:
On-chain limit orders can help users to save on trading fees, as they do not require the services of a central authority to match buyers and sellers.
Accessibility:
On-chain limit orders enable users to trade assets on decentralised exchanges, which can be accessed from anywhere in the world with an internet connection. This can provide greater access to global financial markets for users who may not have access to traditional financial services.
Superimposed Liquidity:
By combining the two AMM models of concentrated liquidity and on-chain limit orders, we have created a hybrid system with both benefits. This will provide more depth and liquidity to the market, as well as precise pricing and reduced slippage for traders. It will also help achieve higher efficiency, deeper liquidity, and increased granularity in price.
And finally, in order to boost the value proposition of placing limit orders, we are also introducing an NFT asset that represents ownership of a specific limit order on the Dfyn exchange called the Limit Order Token.
Introducing Limit Order Token
Limit Order Tokens are designed to provide users with a way to track the status of their limit orders, claim the assets associated with the order, and use them as proof of ownership.
These tokens are non-fungible and each one of them represents a specific limit order and can’t be replaced/exchanged.
This allows users to have a clear & transparent record of their limit order history and allows them to transfer, sell, or trade their limit orders easily. Moreover, Dfyn users can even use them on various yield strategies. These include:
- Staking
- Liquidity provision
- Yield farming
- Referral programs
- Token burns
- Voting rights
By participating in these yield strategies, users can earn additional rewards and increase the value of their limit order tokens.
For example, by providing liquidity to the decentralized exchange’s trading pairs, users can earn a share of the trading fees.
By staking their limit order tokens, users can earn additional rewards. By participating in liquidity bootstrapping pools, users can earn even more rewards.
About Dfyn
Dfyn is the world’s first on-chain limit order DEX. It combines the power of an RFQ matching engine with a concentrated liquidity AMM.
