Carbon DEX Aims to Bring CEX Trading Capabilities to DeFi

The past few weeks have been a rollercoaster across the cryptocurrency world as the industry waved goodbye to one of the largest cryptocurrency exchanges, FTX, led by Sam Bankman-Fried. The unfortunate implosion of FTX, following the recent failures of Voyager and Celsius, has brought renewed interest for on-chain, public, and transparent decentralized exchanges (DEXs) to finally displace centralized exchanges (CEXs). Despite the calls, DEXs are still a long way from overtaking their centralized counterparts as the main channel for crypto trading. But why?  

CEXs vs DEXs: Can crypto users finally accept DEXs?

One of the key issues limiting the adoption of DEXs is the superior infrastructure that CEXs have offered until now, especially for traders. DEXs still do not support common trading strategies like limit orders, range trading and dollar-cost averaging (“DCA”), preventing many retail and institutional clients from adopting DEXs at scale. Meanwhile, one of the key activities supporting DEXs – liquidity provision to automated market makers (AMMs) – has proven to be unprofitable for most users due to so-called “Impermanent Loss”. In many cases, DeFi yields have even dropped below U.S. Treasury bond yields, leaving users with diminished ways to effectively participate in DeFi markets. With DEX growth stalling in recent months, the question remains: Even as the public calls for decentralized and transparent exchanges, will crypto users ever really accept DEXs as the main channel for trading their digital assets? 

Carbon DEX Aims to Bring CEX Capabilities to DeFi

Carbon, a newly announced decentralized exchange, could help counter the monopoly of centralized exchanges. According to their Twitter announcement, Carbon introduces the advantages of CEXs to DEXs via its “Asymmetric Liquidity” model. 

As detailed in Carbon’s “litepaper”, Asymmetric liquidity is a new form of on-chain liquidity that allows for the creation of personalized trading and active market-making strategies defined by one or multiple adjustable “bonding curves” simultaneously. A bonding curve is effectively the underlying math determining how a given AMM algorithmically executes on-chain trades. Unlike previous AMM models, where a trader only had the option of choosing a single curve and range in which to place their liquidity, Carbon gives users the ability to provide liquidity to two curves that each trade in one direction. In this design, the buying and selling of an asset are governed by separate, user-defined curves, giving users greater control to express their trading preferences. 

For example, a user can deploy a two-curve strategy where one curve buys ETH between 1200 and 1300 USDC and the other curve sells ETH between 1500 and 1600 USDC. ETH accumulated in the first curve becomes instantly available to sell for USDC as prices cross into the range defined in the second curve.

How Carbon compares to existing DEX models

One of the biggest issues on current AMM models is the risk of impermanent loss (IL), whereby a liquidity provider (LP) is only profitable when the relative price between the tokens provided in a pool remains constant. In Carbon, there is no Impermanent Loss, in the sense that orders are not buy-and-hold liquidity positions, but the expression of a particular trading view. Carbon orders can take the form of native on-chain limit orders, dollar cost averaging (“DCA”), and “buy low, sell high” range orders.

As per the litepaper, key features of Carbon include:

• Asymmetric and Irreversible: individual user strategies may be composed of independent buy and sell orders which trade in a single direction and are therefore irreversible on execution.
• Concentrated and Adjustable: order conditions are pre-defined using specific concentrated ranges, and may be updated on the fly without closing and recreating the order.
• Composable: multi-order strategies automatically shift liquidity between linked orders as they are filled, reducing the cost of manually creating orders.
• Re-usable: tokens acquired in one order become available for trading in a linked order once markets move into range.
• MEV-Resistant: trading is resistant to sandwich attacks, the most common form of Miner Extractable Value (“MEV”).

Conclusion

Carbon’s solution could revolutionize the DEX industry by giving traders greater control over their on-chain trading, for example to set limit orders and create automated strategies that buy low and sell high, and also dollar cost average (DCA) their trades. The introduction of these advantages could very well see the adoption of DEXs grow substantially, as more and more users look for alternative options to CEXs.