Understanding Order Books and Challenges Facing Centralized Order Books 

FinanceFeeds Editorial Team

One of the most common tactics that cryptocurrency day traders use in their trading is studying order books, to determine the momentum in the market.

An order book, according to Investopedia, refers to “an electronic list of buy and sell orders for a specific security or financial instrument organized by price level”. This electronic list shows the number of shares or crypto tokens are being bid or offered at each price point. The lists have become more important by the day in the crypto market given the recent volatility as they improve the market transparency and enable traders to identify excellent entry or exit price points. 

A Closer Look at Centralized Order Books

As explained above, order books are kind of a data centre for exchanges and traders to get information on the assets on offer. Almost every exchange uses order books to list the buy and sell orders for different assets – for our case we will look at cryptocurrencies specifically. While over-the-counter (OTC) exchanges mostly use manual order books, market exchanges prefer the electronic order book which is a dynamic list that is updated every second or less. 

The order book is listed in descending order on the buy side, with the highest bid listed first. On the sell side, the order book is listed in ascending order with the lowest ask price appearing first. These point to the predominant market and price that need to get an order executed. Below is an example of an order book of the BTC/USDT pair on Binance, the world’s largest centralized crypto exchange. 

Centralized order book (Image: Binance)

As is with exchanges, order books also have centralized and decentralized order books. The latter was launched to cover the failings of centralized order books, which retained the structure of order books created for the traditional financial markets. In the next section, we discuss some of the top challenges that forced the switch to decentralized order books. 

The Challenges Facing Centralized Order Books

Before delving into the specific challenges that face centralized order books, it is important to understand the very challenges that led to the creation of decentralized exchanges. 

First, centralized exchanges maintain custody over your private keys. Entrusting an exchange with your private keys means you don’t fully control your own money. Additionally, exchanges are a prime target for hackers for the large amounts of money they hold. While not a common occurrence, when it happens, it could cost investors millions of dollars.

Cons of Centralized Order Books

One of the largest issues facing centralized order books is a lack of transparency. Over the years, several centralized exchanges have been accused of manipulating their order books in an opaque manner conducting insider trading, fake volume, wash trading, and price manipulation. This gives traders a false view of the order book which could lead to traders making trades they should not have completed. 

Additionally, due to increased regulatory oversight over the crypto field, CEXs are increasingly collecting traders’ information, holding their identity documents in a centralized and non-private manner. This opens the possibility of potentially exposing their users’ personally identifiable information (PII) in case of a data leak.

Finally, the lack of decentralization on the crypto CEXs also raises the possibility of the owners of the exchange making away with the users’ funds. As it happened with Quadriga CX, a Canadian crypto exchange that mysteriously lost $190 million in users crypto assets after the CEO (who held the private keys) allegedly passed on. 

A Clear Path to Transparent Trading

The challenge above has forced a number of investors to move towards decentralized solutions that remain transparent, open for everyone, and let users control their own private keys. Nonetheless, traders also face challenges on decentralized exchanges (DEXs). Over the past two years, DEXes on Ethereum have become synonymous with high fees as the blockchain gets overloaded and transaction fees skyrocket to over $100 at times of high demand. Notwithstanding, the blockchain transaction times (7-15 TPS) also cause many transactions to fail or delay. 

Decentralized order book (Image: Polkadex)

To this end, Polkadex, a DEX built on Polkadot, an Ethereum scalability solution blockchain, Polkadex who is built with Substrate is aiming to build a decentralized orderbook. Simply, the order book is aiming to bring advanced trading features to users of a non-custodial exchange, while solving the challenges facing centralized order books. 

A New Trading Experience With Decentralized Order Books

Polkadex offers users a decentralized, transparent and fast trading platform that easily rivals its centralized counterparts. Here are some of the features that Polkadex offers to solve the challenges troubling the centralized exchanges. 

  • Broad functionality and advanced trading tools

The DEX provides algorithmic trading, high-frequency trading, and on-chain trading bots allowing users to connect to bots such as Hummingbot or 3Commas through APIs. Unlike most DEXs, Polkadex also provides traders with more features such as the ability to set limit and stop-loss orders, margin calls and more.

  • Custody and security of funds

On Polkadex Orderbook, user funds always remain on the native blockchain and are controlled only by the user’s private key. This solves the security conundrum that faces CEXs, which experience hacks every other day. 

  • Fiat support

One of the major advantages CEXs hold over DEXs is the simplicity of converting fiat currency to crypto. In a first-of-its-kind, Polkadex integrates fiat gateways and markets via fiat on-ramp and off-ramp functions meaning that you can buy crypto using your credit card and cash out your crypto assets into fiat in one click. 

  • Zero gas fees

Polkadex order book also minimizes the fees paid for trade. Built on the Substrate framework, the platform eliminates any network fees, which not only makes the trades cheaper but also solves the front running problem. Eliminating the network fee not only takes away the power to control the order of execution from users with deeper pockets but also cancels the economic incentive to engage in front-running in the first place.

Last Words

The sudden growth of crypto in value and adoption rates calls for better, more transparent, and feeless order books to be built. Centralized exchanges, decentralized exchanges, hybrid exchanges—while they all provide users with a way to interact with cryptocurrency, they’re vastly different in several critical aspects. With the rise of decentralized solutions such as Polkadex, traders are open to trade without any privacy issues and on a transparent platform. 

Read this next

Retail FX

ThinkMarkets expands CFDs lineup to over 4000 ETFs and shares

ThinkMarkets has expanded its service offering by incorporating 2500 new CFDs on shares and ETFs on its ThinkTrader platform.

Retail FX

France regulator warns investors of Omega Pro, Businessempire.fr

France’s financial markets regulator alerted investors that scams related to Omega Pro Ltd are beginning to circulate, with the blacklisted firm capitalizing on the situation to run a range of “unrealistic” offers.

Digital Assets

Web3 platform Grand Time paid $2 million in token earnings to date

Community-driven Web3 platform Grand Time said its offering – which includes a multifaceted platforms and its native token – has been gaining significant traction highlighted by impressive operational metrics.

Institutional FX

FX volumes at MOEX halved in April as ruble gains gorund

Currency trading at Moscow Exchange (MOEX) halted its upward route in April as monthly volumes nearly halved from a month earlier.

Digital Assets

FTX US adds stock trading, fractional shares to crypto platform

FTX US, the American subsidiary of crypto exchange FTX has kicked off stock trading feature to its customers in an effort to compete with popular platforms such as Robinhood and eToro.

Industry News

UK FCA empowered to remove brokers’ permissions in 28 days

Businesses with permissions they don’t need or use, risk misleading consumers. These new powers will enable us to take quicker action to cancel permissions that are not used or needed.

Industry News

CFTC charges $44m Ponzi scheme but millions may have fled to foreign crypto exchange

The CFTC alleged that defendants transferred millions of dollars to an off-shore entity that, in turn, may have transferred funds to a foreign cryptocurrency exchange. None of these funds were returned to the pool.

Technology

Saxo Bank deploys Adenza to address Basel and EBA requirements

The integration of ControllerView will enhance Basel-driven capital calculations and reporting at Saxo Bank in support of the bank’s multijurisdictional capital and liquidity reporting requirements throughout Denmark, Switzerland and UK, with plans to expand into the Netherlands.

Executive Moves

ComplySci appoints CTO, CPO, and CLO to further regtech’s product expansion

ComplySci offers compliance software used by more than 1400 global institutions to identify risk and address regulatory compliance challenges.

<