Innovative Advanced Limit Orders in DeFi: Exploring Opportunities and Weighing Risks

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The world of decentralized finance (DeFi) has been continuously growing and evolving in recent years, providing new opportunities for traders and investors alike. One of the latest developments in this sphere comes from the Paris-based Mangrove, a decentralized exchange (DEX) that recently went live on Polygon‘s testnet with a programmable order book. Mangrove has managed to raise approximately $10 million so far and is supported by influential trading and market making entities such as Wintermute and Cumberland. A mainnet launch is set to follow around the beginning of next month.

The explosive growth in DeFi during the summer of 2020 highlighted the potential for anyone to be involved in providing liquidity to financial markets, not just major institutions or firms. However, the initial DeFi tools were somewhat limited in scope, prompting developers to work on refining the infrastructure necessary for this space to flourish.

Mangrove’s innovative “advanced limit order” feature is a prime example of the progress being made. This functionality allows trading intentions, such as a commitment to sell some ETH at a specific price, to take the form of a piece of code that functions like an IOU. This means the offer can exist on-chain without the need to lock up any funds. According to Mangrove co-founder Vincent Danos, this enables traders to utilize those assets elsewhere without having to cancel their initial offer and retrieve the funds.

Danos further explains that when users declare their trading intentions on Mangrove, a market engine will call that piece of code to determine whether the promised liquidity is available and deliver it. Should the liquidity not be present, traders will incur a small compensation or penalty fee, which is related to the amount of gas the taker spent triggering a promised trade that couldn’t be fulfilled.

This added flexibility in limit orders allows Mangrove users to propose selling their digital assets at a specific price while also depositing them as collateral on a lending platform, thus generating passive yield. In essence, this means that a trader can maintain a savings account while also having an established exit price for the sale of their assets.

Although the advanced limit order innovation is promising, it is essential to weigh the possible risks and challenges that may arise in its implementation. As with any new technology or financial instrument, unforeseen issues could potentially impact its operation or adoption. Nevertheless, Mangrove’s introduction of this feature signifies an ongoing commitment to refining the DeFi ecosystem and providing traders with increased options and flexibility in their transactions.

Source: Coindesk

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