In a previous blogpost covering the use cases of LSTs, we mentioned that AMM DEXs are at the top. Monad, with its focus on high throughput, also enables a new kind of DEX rarely seen in crypto up to this point: the CLOB DEX.
A Central Limit Order Book (CLOB) is a type of exchange mechanism utilized in tradfi where buy and sell orders are collected, matched, and executed. This order book maintains an electronic list of buy and sell orders for a specific asset, organized by price level. Orders in a CLOB are typically ranked according to price-time priority, meaning that orders are first prioritized by their price (with the best prices for buyers being the highest and for sellers the lowest) and then by the time they were entered. When a new order is submitted, it is matched against the existing orders in the book, ensuring that trades are executed at the best possible prices available at that time. This method enhances market transparency, as all participants can see the available orders and their respective prices.
Since all orders are consolidated in one central book, it aggregates the market’s demand and supply, allowing for better matching of trades. This centralization reduces the bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept, resulting in more efficient pricing for the securities being traded. Additionally, the transparency of the order book helps market participants make more informed trading decisions, as they can observe the depth of the market and gauge the potential impact of their trades. However, the efficiency of a CLOB depends on the market's liquidity; in less liquid markets, it might be challenging to find matching orders, which could lead to increased volatility and price inefficiencies.
The key advantage of a CLOB is its ability to provide efficient price discovery. On an AMM, a trader is trading along a bonding curve. He is guaranteed to experience some slippage and his trade moves price along that curve, no matter how deep the liquidity in the pools are. On a CLOB, buyers and sellers meet in the middle on price. CLOBs are more efficient, which is why tradfi uses them over AMM structures.
Challenges of CLOBs in web3
No one has ever built a CLOB on Ethereum mainnet, simply because Ethereum is way too slow. Traditional CLOB systems require high throughput to handle the massive volume of trades and orders. Blockchain technology inherently struggles with scalability, as it can process only a limited number of transactions per second. This limitation leads to delays and bottlenecks, making it challenging to achieve the necessary performance levels for a functional and efficient CLOB.
In addition to simple TPS, latency is also a challenge for building a CLOB. Blockchains are global state machines. Unlike centralized systems, where transactions are processed almost instantaneously, blockchain transactions need to be confirmed by multiple nodes across the network. This consensus mechanism results in higher latency, which can severely impact the speed of order matching and execution, both of which are critical for the effective operation of a CLOB.
Like just about everything in DeFi, CLOBs also require deep liquidity to function effectively. Liquidity for CLOBs is particularly important because it ensures there are enough buy and sell orders to facilitate any amount trading. While an AMM could technically operate on low liquidity, albeit with bad price discovery, CLOBs need liquidity just to maintain the orderbook. In the web3 environment, achieving sufficient liquidity for a CLOB is challenging due to the fragmented nature of DEXs and the reliance on individual participants. Without adequate liquidity, order matching becomes inefficient, leading to higher spreads and increased slippage for traders.
Finally, efficient order matching is a cornerstone of any successful CLOB. This requires real-time data processing and rapid execution. A decentralized matching engine is incredibly difficult to build on a blockchain due to, among other things, delays in transaction finality. The need for each transaction to be confirmed by multiple nodes can lead to slower processing times, making it difficult to implement a high-speed, real-time decentralized matching engine. This delay undermines the responsiveness and efficiency expected from a CLOB, forcing wider quotes on spreads. For a chain to sustain a CLOB, it must have extremely high throughput.
How Monad Supports CLOBs
Monad's focus on high throughput and parallelization makes it an ideal platform for CLOBs. As a single-shard, integrated L1, Monad ensures rapid state synchronization across all participants, which is critical for efficient order matching and narrow price spreads.
Kintsu’s liquid staking protocol enhances this by providing deep liquidity through sMON. This LST facilitates seamless trading by acting as a universal collateral across all tokens on the network, enabling CLOBs to offer users minimal slippage and efficient price discovery. The synergy between Monad’s technical capabilities and Kintsu’s liquidity provision ensures an optimal trading experience for users.
Conclusion
The emergence of CLOBs on Monad, supported by Kintsu’s sMON, signals a new era of efficiency and innovation in DeFi. By overcoming the traditional challenges of latency, throughput, and liquidity, Monad paves the way for decentralized trading systems to rival their traditional finance counterparts. Kintsu's role in providing deep liquidity through sMON ensures that CLOBs on Monad will operate seamlessly, offering users better price discovery, reduced slippage, and an optimized trading experience. Together, Monad and Kintsu are setting the stage for a dynamic and efficient DeFi ecosystem, further solidifying Monad's position as a hub for groundbreaking financial technologies.
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