Order Book vs. AMM vs. Peer-to-Pool – DEX Models Explained

As crypto investors shift to non-custodial trading platforms, decentralized exchanges continually experiment with new methods to manage trades and enhance security, user experience, and cost efficiency. 

The primary liquidity models are strategies used by decentralized exchanges to handle users’ trade requests and execute asset swaps efficiently. How a Dex manages liquidity and handles trade requests is essential to its general operation.

Liquidity models contribute significantly to an exchange’s cost-efficiency, security, privacy, and overall user experience.

AMM Dexs are unarguably the most popular, but other liquidity models are rising to fame. First, let’s understand the primary liquidity models used by contemporary decentralized exchanges.

Understanding the Different Decentralized Exchange Models

Here, let’s explain the different Dex liquidity models.

1. Order Book Model

The order book model is similar to the trading system used on centralized crypto exchanges. To create an order, users specify their trading terms (the amount they wish to swap and the desired price they want their order to be settled). 

A central order book holds trade requests created by users and matches the trades using a price and time priority-based system. That is, it displays the highest bid and lowest ask prices at the top, and executes trades automatically when orders are matched. This model is used by Dexs like Serum (on Solana), Orderly Network, WOOFI DEX, and JUMP Dex. 

2. AMM model

The AMM model is an older liquidity model used by Dexs like Uniswap, Curve, and Balancer. The AMM liquidity model is powered by a liquidity pool and a matching algorithm (Automated Market Maker). The Liquidity pool is a smart contract that holds the assets in a trading pair.

Liquidity providers supply resources that enable the protocol to work by committing an equal amount of the assets in the liquidity pair to the pool. When a trader creates a trade request, the AMM executes the trade by swapping the provided asset with the counter asset in the pool. 

The AMM adjusts the value of the paired asset according to the demand and supply conditions. AMM model, however, exposes liquidity providers to risks like impermanent loss and technical exploits.

3. Peer-to-pool (intent-based) model

The Peer-to-pool model is a more gamified trading model. It is also known as the intent-based or solver-based model. Here, a trader’s order is known as an intent. The intent specifies the asset they wish to trade, the amount, and the price they wish to trade at. 

This intent is broadcast to solvers (a network of third parties that compete to execute trade requests) on the network, who attempt to achieve the trader’s goal (provide the resources to complete the trade). 

Solvers analyze various liquidity sources, including DEXs, CEXs, and private order books, to determine the most efficient execution path to complete the trade. Solvers consider cost-efficiency (gas fees), liquidity depth, and best price.

Order Book vs. AMM vs. Peer-to-Pool DEX Models

Here’s a tabulated summary of the differences between Order Book, AMM, and Peer-to-Pool DEX Models.

Factors to consider while choosing a Dex based on the Liquidity model

The Liquidity model used by a decentralized trading platform may significantly impact the outcome of your trader. It is therefore important to consider a few factors before choosing a Dex based on its liquidity model. Some of the factors to consider include;

1. Personal trading strategy

AMM-based Dexs are optimal for traders who only wish to swap small to medium-sized volumes. However, if you are a professional trader who regularly trades large volumes and wants tighter spreads for decentralized derivative trading, the Order Book model works best and offers better liquidity and lower slippage. 

Regular decentralized exchanges are implementing intent-based models for routine swaps, which also offer a better user experience.

2. Cost-efficiency

AMM-based exchanges are relatively more costly than other models. This is because of the multi-level blockchain-level transactions that attract gas fees and higher slippage, which increases the cost of each trader. 

The intent-based model handles gas costs more efficiently and offers a better cost-to-value ratio. The order book model is also relatively cheaper. You can consider both models if you prioritize cost-efficiency in your trade.

3. Liquidity

Liquidity constraints on AMM-based Dexs may result from a limited number of liquidity providers and insufficient resources in the pool. If you trade large volumes, it is important to consider the capacity of the pool. 

When using Intent-based and order-book decentralized exchanges, your trades are executed at stipulated conditions. These models, therefore, offer less slippage due to better liquidity.

4. Security and Privacy

Privacy solvers maintain transaction privacy for Peer-to-pool Dex models. However, for personal transaction privacy, AMMs may be the go-to model for retail traders. While your transactions are visible in the mempool, they are executed instantly. Order Book and Intent-based models keep a transparent record of your orders until they are executed.

5. Blockchain network

AMM-based decentralized exchanges are popular on Ethereum and Base network, while networks like Sei and Solana have more Dexs like Serum that use Centralized Limit Order Book (CLOB). For networks like Ethereum, liquidity and trading conditions may be better on AMM-based Dex as they have higher adoption.

Conclusion

DeFi enthusiasts are conversant with the AMM model. Most early Dexs, lending protocols, and Perps trading platforms use the AMM model. However, the Order Book models and the intent-based models discussed in this article also offer several advantages. 

As a trader, the essence of this review is to understand how an exchange works and also implement this knowledge in your daily trading activity. 

It is recommended that you use a trading platform whose liquidity model serves the highest advantage for your trading strategy. Consider security and privacy as paramount factors; however, cost-efficiency and general user-friendliness are important.

Additional Resource

1. https://coingape.com/education/what-are-liquidity-pools-heres-all-you-need-to-know/
2. https://coingape.com/education/decentralized-exchange-dex/
3. https://www.britannica.com/money/centralized-vs-decentralized-crypto

Disclaimer: This article reviews and compares Dex liquidity models. It intends to educate readers and not offer financial advice. Featured projects are not endorsed. Note that crypto investments carry significant risks.