In the first part of our blog series on Monad, we took a look at how Monad addresses the scalability and performance limitations in existing EVM networks. With support for over 10,000 transactions per second and sub-second finality, Monad is opening up a new design space in DeFi.

In this article, we explore how Monad’s ultra-fast architecture and low gas costs are unlocking efficient EVM-based onchain order books and the advantages of order book liquidity for end-users.

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What are order books?

When it comes to trading, liquidity is king. Liquidity is the measure of how easily someone can buy or sell an asset, without impacting its price.

There are three primary liquidity models in DeFi: open order books, automatic market makers (AMMs), and request for quote systems (RFQ).

One way a market achieves liquidity is through the use of order books, like in a stock market. On a traditional exchange platform, buyers and sellers offer up different prices for an asset, and those orders are matched with each other based on that exchange's order book, called the central limit order book model (CLOB).

Exchanges have a CLOB for each market, for example for ETH-USDC or DAI-ETH. With order books, the orders are arranged by price, showing the highest bids, which are the buy orders, and the lowest asks, which are the sell orders.

When buyers and sellers of an asset place orders, they specify the price and quantity of the asset that they want to buy or sell, and then an exchange matches those orders, which establishes a price for the asset. Professional market makers (MMs) also provide liquidity in order books, ensuring users can always trade.

In DeFi, automated market makers (AMMs) have become the primary way to trade tokens across the ecosystem. AMMs rely on liquidity sourced from other users and pooled together in a liquidity pool. In liquidity pools, liquidity providers  “lock” equal amounts of two or more tokens into a smart contract to be used as liquidity for trades from other users. AMMs then automate the execution of trades.

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The benefits of order books

Each of these liquidity models have their strengths and weaknesses.

When trading on decentralized exchanges, there are a range of variables that can alter the price of a trade, such as slippage, gas fees, and price impact. Slippage in particular can impact prices. MEV bots attempt to extract as much as they can from AMM trades, increasing slippage.

Order books enable traders to enter and exit trades easily and with confidence that market prices won’t dramatically change in the middle of their trade. They come with a number of advantages when it comes to DeFi:

• Price Efficiency: Traders can place orders at exact prices and sizes, enabling better control over price execution.
• Reduced Slippage: CLOBs match orders at quoted prices if available, leading to reduced slippage that is inherent in AMMs.
• Competitive Liquidity: CLOBs incentivize competition among market makers, which can lead to improved pricing for traders.

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As our research has shown, professional market makers, whether providing liquidity through RFQ or order books, are well-suited to serve blue chip trading pairs due to their sophisticated strategies to predict which way the market is heading in the short term - resulting in better prices for these pairs than AMMs. This includes some of the most highly traded non-pegged trading pairs, including WETH-DAI, WETH-WBTC, etc.

CLOBs also support advanced order types, open up additional trading strategies and giving traders more control, including:

• Buy limit orders: Traders specify the maximum price they’re willing to pay for a token. The order will only be executed at that price or lower. If the market doesn’t drop to the limit price or lower, the order won’t be filled.
• Sell limit orders: Traders specify the minimum price they’re willing to sell a token for. The order will only be executed at that price or higher. If the market doesn’t rise to the limit price or higher, the order won’t be filled.
• Stop loss orders: Combines a stop order and a limit order. The stop order triggers the limit order when a specific price is reached, helping traders minimize losses in the event of large price changes.

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Why Monad?

The reality is that order books are not practically feasible on most chains, especially Ethereum. For an order book to function well, it requires fast block times and low gas fees. Until now, EVM chains were often both too slow and too expensive.

Thanks to Monad’s 10,000+ TPS and 1 second block finality, efficient onchain order books are possible for the first time.

Monad will enable EVM-based onchain order books (CLOBs) for perps and spot trading, allowing market makers to provide frequently updated quotes onchain at low gas costs.

For example, let’s take a look at Kuru. Kuru is a fully onchain order book exchange built on Monad that aims to close the gap between decentralized and centralized exchanges. 

With Kuru’s order books, traders get the best of both worlds with slippage protection, self-custody, and composability. Market makers will be able to place limit orders with low gas costs, leading to tighter spreads and more liquidity on the books.

Deeper liquidity and greater diversity of sources means better pricing for end-users. Order books open up additional avenues for trade route optimization and ensure your users get the best executed prices.

0x will aggregate order book liquidity, alongside AMMs, for the deepest liquidity on Monad from Day 1.

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Start building on Monad with 0x

Swap API makes it easy to access deep liquidity from 150+ exchanges at the best prices, offering the smoothest trading experience and best prices in DeFi.

Developers looking to embed swaps on Monad in their app can start building with Swap API on Monad testnet today. For comprehensive documentation and resources, visit https://0x.org/docs.