2/ What is the difference between these 2 models, is there any reason why DEXs go for another mechanism? What is a sensible evolution that we could expect? Let’s dive deep!

3/ Order book model is basically a matching mechanism, which matches the buy and sell orders. Traders place orders to bid/ask an asset at a specific price, orders are closed when there is a price match, or else left open and fill the order book.

4/ The gap between the highest bid and lowest ask is the spread, the deeper the liquidity the smaller the spread. In a liquid market, orders could be closed swiftly at the desired price; while one could wait for long to close an order on an order book with insufficient liquidity.

5/ Liquidity of an order book comes from 2 sources — traders and market makers (MM). MM refers to a firm/individual who actively quotes 2sided markets, providing bids and asks along the order book to take profit by arbitrage.

6/ There are basically 2 order placements — mkt order and limit order. Mkt order is closed instantly by taking the best market price at the order book. Thus, a mkt order placement is a “taker” which takes away liquidity from the order book; hence they usually pay higher fees.

7/ Pros: -Traders can wait to close at desired price; -No slippage if the market is liquid; -Widely used by tradefi and CEX, intuitive for individual and institutional investors; -Specific order types, e.g. stop loss, are available. Cons: -Trade exp is poor if the mkt is illiquid

8/ AMM model is a gas efficient solution for a market lack of liquidity, and an easier way to swap tokens. Pioneered by Uniswap, AMM usually works with a simple formula - X * Y = K Whereas X and Y represent the qty of the trading pair tokens in the pool and K is a constant.

9/ Let’s use the ETH/USDC trading pair as an example. Assume ETH is trading at 2000USDC at the moment, there are 1ETH 2000USDC in the trading pool right now, the constant K=2,000. If Alice sells 0.1ETH now, we expect Alice to receive 200USDC, which is the current market price.

10/ The case is when Alice sells 0.1ETH, there is a total of 1.1ETH in the pool, the qty of USDC in the pool would be 1818 to keep K unchanged; thus Alice could only get 182USDC=>9% slippage. Slippage is significant when the trade amt is large and the pool liquidity is inadequate

11/ AMM's liquidity comes from a pool of fund of that particular trading pair. Everyone could be a Liquidity Provider (LP) by depositing tokens into a liquidity pool, LP earns rewards by sharing the trading fees paid by the traders.

12/Pros: -Facilitate trading for illiquid markets; -Price quote is always available, traders do not need to wait to match with any counterparties to close an order; and -Gas efficient, trades could be completed in one transaction.

13/ Cons: -Block traders could suffer from significant slippage if a pool is illiquid; -LPs could suffer from IL if the prices of the tokens in the pool moved against each other; and -Capital utilization is inefficient as most trades are executed within a certain range only.

14/ Why AMM? Simple. Because of gas. AMM model is gas efficient, it closes any trade in a single transaction by determining the price with the formula. Imagine how many transactions are needed to complete a single order in the order book model?

15/Tks to L2 dev, trx on rollups are a lot faster and cheaper! Rollups increase scalability, yet provide the same security level as L1. Funds are held by smart contract on the mainchain, computation and storage are done off-chain. Thus, orderbook on DEX is made available again!

16/ MES Protocol is an order book based exchange running on zkSync and StarkNet. Absorbing every beautiful feature of rollups, we provide speedy and extremely affordable trades, and your transactions are backed by Ethereum’s security.

17/ We understand liquidity is essential, a hybrid liquidity mechanism is introduced. There is a presence of AMM and an order book to support the liquidity of the DEX. Every liquidity provider counts, no matter AMM pool LPs, or market makers at the order book would be rewarded.

18/ MES Protocol’s development is in progress and it will be ready on testnet very soon! Stay tuned!🤩 Medium: