A Deep Dive into Orbs Protocols: Unlocking Advanced Trading Tools
One of the main benefits of on-chain trading on decentralized exchanges is that all functions are carried out according to specifications set by the end user. At no point does the user cede control over their funds to a centralized third party, instead retaining their autonomy throughout the execution of the trade.
While this fact successfully tackles many of the trust issues inherent to centralized trading, trading on decentralized platforms is not without its own problems.
Still in their infancy relative to proprietary trading platforms, decentralized exchanges (or DEXs) face a litany of limitations, from fragmented liquidity, limited trading tools and fewer options compared to their centralized counterparts, to price slippage that makes precision trading more difficult.
In response to such challenges, Layer-3 blockchain infrastructure protocol Orbs is aiming to bring a high-level trading environment to DEXs, one that matches or even exceeds that found on centralized platforms.
Let’s take a look at some of the core features of Orbs, features that enable DEXs implementing its L3 infrastructure to deliver a CEX-like trading experience in the decentralized arena.
What is Orbs and Layer-3?
Layer-3 blockchain technology can be thought of as that which plugs into and complements Layer-1 and Layer-2 networks.
Blockchains like Bitcoin, Ethereum and Litecoin are regarded as Layer-1 networks. Built from the ground up, they are the foundational layer upon which the blockchain’s functionalities and services are built.
Layer-2 networks are those which iterate on top of a Layer-1 and typically augment or enhance its operational capacity. Typically implemented to increase scalability, L2s are represented by blockchain projects like Polygon, Arbitrum, Optimism, Loopring, and many others.
Layer-3 protocols like Orbs, meanwhile, enhance the function of both Layer-1 and Layer-2 networks by introducing more advanced smart contract logic that enables a range of features not currently found on decentralized blockchain networks.
Specifically, Orbs’ toolkit is designed to expand and enhance decentralized trading platforms. It does this by implementing a suite of trading features usually found on CEXs, and which, until very recently, were deemed impossible to implement in a decentralized manner.
These are dLIMIT, dTWAP, Liquidity Hub, and Perpetual Hub.
What is dLIMIT?
One of the standard tools in a centralized trader’s arsenal is the limit order, which allows them to set a minimum and maximum price at which they’re willing to sell or buy digital tokens.
Implementing such a feature on decentralized systems demands complex smart contract logic. Faulty implementation can result in orders not being filled, or executing at the wrong price.
dLIMIT is the fully-functional decentralized equivalent to the common limit order which has been used by DEXs to process hundreds of millions of dollars of trades since 2023.
Orbs’ dLIMIT enables limit orders to be carried out with the same level of reliability and fairness as the best CEXs, backed by aggregated liquidity pools and a network of incentivized Proof-of-Stake (PoS) validators who guarantee 24/7 uptime.
dLIMIT trades consist of two main components:
Makers: These are the DEX traders who ‘make’ orders by submitting price bids. Makers define the order parameters including the limit price.
Takers: These are incentivized third parties who survey the orderbook and select the best bid that delivers the optimal price to the maker. Bidding uses an English Auction process to ensure the order is filled at as close to the maker-defined price as possible.
What is dTWAP?
TWAP (Time-Weighted Average Price) is an algorithmic trading strategy that allows traders to break their order up into multiple smaller sections which are then executed at different specified intervals.
TWAP trades are typically used to reduce price impact from single large trades, or to implement a dollar-cost averaging (DCA) strategy, where assets are purchased on a recurring long-term schedule.
Scheduled recurring purchases are a common feature of CEXs, and thanks to Orbs’ incentivized maker/taker system, can now be implemented on DEXs in a wholly trustless manner.
By spreading trades over a longer timeframe, dTWAP allows DEX traders to minimize price slippage and mitigate the effects of short-term volatility when executing large orders.
Liquidity Hub
Orbs’ Liquidity Hub enables DEXs to access external liquidity sources, providing a significant upgrade to the widespread use of Automated Market Makers (AMMs).
By aggregating liquidity from multiple external sources, Liquidity Hub allows DEXs to provide much better prices by always having reserves available for trades.
Liquidity Hub employs on-chain solver auctions where incentivized third parties compete to fill swaps using either on-chain liquidity or their own inventory. Additionally, institutional traders can submit bids via API.
Users benefit from this setup as it offers the possibility for gasless transactions, and protects the network against the problem of Miner Extractable Value (MEV) exploitation.
Perpetual Hub
Perpetual Hub is Orbs’ suite of services which facilitate on-chain perpetual futures trading. Futures contracts give traders the option of buying and selling assets at a specified price on a specific future date – a feature previously not possible on DEXs.
Perpetual Hub functions using three main components:
Hedger: The hedger acts as a market maker, supplying liquidity by filling traders’ orders and making use of external liquidity sources (including CEXs) for enhanced liquidity.
Liquidator: Orbs’ liquidators track leveraged positions and liquidate them when collateral falls below specified maintenance margins. Liquidators earn fees in return for their services.
Price Oracle: The Orbs Price Oracle maintains a ceaseless supply of reliable and decentralized price data which is crucial for calculating unrealized profit and loss, and for triggering liquidations.
By leveraging this combination of components, Perpetual Hub aims to offer a comprehensive protocol for decentralized perpetual futures trading, enhancing both capital efficiency and liquidity.
Transforming DeFi and DEX Trading
The array of tools examined above represents the cutting edge of modern decentralized trading technology – enabling DEXs and other decentralized services to bring a CEX-like feature set to the decentralized realm for the first time.
In the past, a typical DeFi user had to accept the non-negotiable trade-offs that came with trading on-chain. However, as more and more DEXs implement Orbs’ Layer-3 infrastructure, these trade-offs will become a thing of the past.
With CEX-standard features like limit orders, time-weighted price averages and perpetual futures, DEX trading today is leagues better than it was even a few short years ago.
And thanks to Orbs’ ability to draw liquidity directly from external sources, the difficulties and price fluctuations historically associated with DEX trading are no longer a reason to forego fully on-chain trading.