Swaps

The Status Quo in TradFi

Markets have evolved historically from a structure that made sense when humans traded among each other at special venues to a perverse system where speed is elevated above all. Specialized firms called Market Makers (MMs) provide liquidity but have to understand and protect themselves from the tricks of High Frequency Trading (HFT). Investors can nowadays generally instantly trade deep books at small spreads. What appears to be working well at first means that

  1. The fastest exchange will be the most liquid exchange.
  2. Markets for special, unpopular or particularly risky assets will not be traded by most MMs and thus only standard products will have efficient markets.
  3. Regulations and enforcements are needed to tame the worst extractive strategies and protect users, and actors must go through surveillance, registrations and licenses for each product offer.
  4. MMs and exchanges must be paid for providing the algorithms, tech and infra of the HFT arms race (a sort of prisoner's dilemma that wastes human resources) and still yet, more money is siphoned off by purely extractive HFT firms. This money has to ultimately come from somewhere.
  5. Those who manage to trade first in special moments, for example to exit in a market-wide crash, or for assets strongly tied to an aspect of the real world with incoming news, get vastly different prices at the cost of those who come second or later, often also including MMs (stale-quote sniping).

Decentralized Markets

Truly decentralized, liquid markets for fungible digital assets should not require the participation of specialized entities.

However

  • Current market mechanisms rely on liquidity middlemen, also on blockchains.
  • When assets are new, or rare, risky, and for example created by a user to be traded based on local trust, such middlemen are again unlikely to participate, and markets for such assets will therefore be too illiquid. This is the reason that we have not yet seen applications at scale that leverage the democratic nature of blockchains to the fullest.
  • For popular assets with large volume, due to high costs of providing speed in decentralized systems in comparison to centralized exchanges, it is clear that decentralized exchanges cannot outcompete centralized exchanges. Not just the liquidity, but the markets themselves will be centralized for popular assets.

The GLOB removes the need for speed. Markets are now cheap and efficient, even on blockchains. At the same time, because filling order intents on each side are aggregated and traders are taking the role of liquidity providers, the scaling is such that with increasing participation prices become increasingly stable without professional participation.

The GLOB thus enables markets that scale from the smallest and most special use cases (such as just one trader and one filler, or two traders, which are safe and fair by default), to ultimately power the biggest decentralized marketplaces that can outcompete centralized exchanges because they are cheaper and simpler to run.