What if we traded in 3D instead of 2D. Let me explain.
13 Sep 2023, 05:18
What if we traded in 3D instead of 2D? Let me explain.
In traditional trading, we usually think about two main factors: how much we want to buy or sell (that's the SIZE) and at what price we're willing to do so (that's the PRICE).
It's like plotting points on a flat graph.
But what if we add a third dimension to this graph: TIME?
Concentrated liquidity allows us to define the SIZE of an order as a function of its PRICE, letting traders specify liquidity within particular price bands.
UniswapX dutch orders add the TIME element by allowing the price to decay over a specific period, effectively making PRICE a function of TIME. The issue there is trade fill latency. Running a dutch auction takes time.
When we combine these two, we create a 3D trading environment where the SIZE of an order is influenced by both PRICE and TIME.
/sam_sends/status/1701827758073294928/photo/2 read image description ALT
Searchers are able to partially fill traders at a defined price slippage. Better price, more fill. Worse price, less fill.
That allows searchers to circumvent the dutch auction. Instead of waiting for the price of an order to come down in the next few blocks, they can go ahead and fill at a slightly worse price.
Here's why this is interesting:
1. Order fill latency gets brought down.
2. Searchers are incentivized to maximize the liquidity filled in a batch of orders, and thus there is an incentive to give the traders the best possible price execution to unlock larger fills.
3. The system allows for dynamic liquidity levels at different prices, making it easier for searchers to fill orders and offering the system greater flexibility.
4. Traders act like LPs, placing liquidity in targeted ranges that can adapt over time, resulting in a richer expression of liquidity. See graph ↓
/sam_sends/status/1701827758073294928/photo/1 read image description ALT
Inspired by @jump_ searcher limit order book, and @uniswap X. Open to opinions and pushback.
cc @danrobinson