Dfyn V2.0: Understanding Point Tick Liquidity Concentration to Limit Orders
One of the core tenets of Dfyn V 2.0 is complete transparency, and that’s why before the launch of our mainnet, we wanted to introduce you to the technical architectural foundations on which Dfyn V 2.0 is built.
In this blog, we’ll explore how we use point tick liquidity concentration to limit orders.
Now, before we dive into this methodology, we need to provide some context for it to make sense.
Let’s start by introducing two types of liquidity that exist within Dfyn’s ecosystem:
- Concentrated Liquidity
- Limit order Liquidity
Let’s start with Concentrated Liquidity
Most AMMs currently follow the XYK model, based on the x*y=k price curve. In which liquidity is distributed evenly, allowing users to trade assets within the infinite interval (0∞).
Now in a measure to increase capital efficiency and deepen liquidity, at Dfyn we introduced concentrated liquidity mechanics where liquidity providers (LPs) can accumulate their capital to smaller price intervals than (0, ∞), which enables individualized price curves.
Limit order liquidity on the other hand is the liquidity provided by the limit-order creators at the particular price point at which they want to execute their limit orders. Currently most DEXs leverage the architecture of Bi-directional concentrated liquidity for this purpose.
In this mechanism, as price moves in 1 direction, LPs gain more of that asset as swappers demand the other until their entire liquidity consists of only 1 asset. Now when this trend changes & swappers demand other assets the price moves & the assets in LPs liquidity position changes accordingly.
However, with Dfyn V 2.0 we’re introducing an alternative to this existing paradigm with Unidirectional Limit Orders. In this paradigm, traders can place their limit order which consists of only one asset which they want to swap to another when the market price reaches their desired buy/sell price.
And the best part is that these limit orders will be placed on the concentrated liquidity curve itself.
The reason we’ve introduced this seismic shift to the conventional norm is because, when the limit order liquidity is embedded on the concentrated liquidity curve, unlike other exchanges, Dfyn V 2.0 gives the assurance of filling user’s limit orders once the price has crossed.
Now let’s understand how we achieved this.
To understand that, let us now introduce you to the concept of ticks in Dfyn V2
In financial markets, a tick refers to the smallest possible change in the price of a financial instrument. For instance, if a particular asset has a tick size of $0.01, this means that its price can only be altered in increments of $0.01 and cannot fluctuate by a smaller amount. The tick size for different securities may vary depending on various factors, such as the liquidity of the security and the minimum price movement that the market can accommodate.
Tick Representation in Dfyn V2:
Dfyn V2 allows for more precise trading by dividing the price range [0,∞] into granular ticks, similar to an order book exchange. Here’s how:
The Dfyn V 2.0 system defines the price range for each tick, rather than relying on user input. The trades within a tick still follow the pricing function of the AMM, but the equation must be updated when the price crosses a tick. For every new position, we insert two elements into the linked list based on the range’s start and end prices.
Orders can be executed at any price within the tick’s range. In the case of limit orders, we have “limit order ticks”
So the way we embed the limit order liquidity on the concentrated liquidity curve is by placing it on limit order ticks.
These limit order ticks are then embedded on the concentrated liquidity curve of the pool along with all the other ticks.
This way, when the price crosses the limit order tick, the order gets filled and the user can claim the limit order even if the price crosses the tick back in reverse direction. Moreover, in a limit order tick once one asset is converted to another it will not reverse back into the previous asset like a LPs position.
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.
