The Gridex Protocol
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2023-12-24
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The Gridex Protocol
November 2022 [Updated January 2023]
contact@gridex.org
Abstract
The Gridex Protocol is a permissionless and non-custodial trading protocol
consisting of a set of persistent, non-upgradable smart contracts on the Ethereum
blockchain. Unlike the current mainstream decentralized exchanges based on the
Automated Market Maker (AMM) model, Gridex is based on order books. With our
novel Grid Maker Order Book (GMOB) model, we have significantly reduced the
resource consumption of running an order book based system, allowing us to deploy
and run it on the Ethereum blockchain while making the gas cost comparable to
that of AMMs.
1.
Introduction
Since 2020, the surge of decentralized exchanges (DEXs) based on the Automated Market Maker (AMM)
model – or more precisely, the Constant Function Market Maker (CFMM)
[1]
exemplified by Uniswap;
has led to the AMM model becoming the norm of DEXs. The minimal resource consumption of the
AMM model compared to the Central Limit Order Book (CLOB) model - mainly utilized in traditional
exchanges, makes it the key to easily implementing an on-chain system of smart contracts. DeFi would
not be where it is without AMM, but it cannot meet the diverse needs of traders and market makers due
to impermanent loss
[2]
, high slippage, and lack of flexibility. Particularly in the AMM model, the greater
the market volatility, the greater the risk of impermanent loss faced by liquidity providers (LPs).
Consequently, the AMM model is most suitable for less volatile trading pairs, such as swaps between
stablecoins
[3]
.
The algorithms of matching engines, commonly implemented in centralized exchanges (CEXs) based on
the CLOB model, consume a large number of resources making it difficult to deploy and run on the
Ethereum blockchain. Some DEXs have attempted to solve this issue by implementing matching engines
and order books off-chain
[4] [5]
. However, such solutions not only increase the risk of centralization (to a
certain extent) but also limit their ability to interact with other protocols, making it impossible to utilize
or contribute to the open ecosystem of Ethereum effectively. Henceforth, we have created the Grid Maker
Order Book (GMOB) model and the Grid Price Linear Movement (GPLM) algorithm, which we describe
in Sections 2 and 3, respectively. Compared with the algorithm of matching engines, GPLM is simplistic:
resource consumption is significantly reduced, and it is easily implemented in smart contracts on the
Ethereum blockchain.
2. Grid Maker Order Book
The Gridex Protocol is based on the GMOB model. In the GMOB model, maker orders are similar to
limit orders in the CLOB model. However, there are three distinct differences:
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