Understanding Order Books and Challenges Facing Centralized Order Books
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.
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.
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.
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.