The DeFi trading landscape offers two fundamentally different execution models: Automated Market Makers (AMMs) and Order Books. Each has distinct advantages depending on your trade size, the asset pair, and market conditions. Knowing when to use each can significantly improve your execution quality.
AMM Mechanics
AMMs use mathematical formulas to determine prices based on the ratio of tokens in liquidity pools.
AMM Advantages
- Always available liquidity: No need to wait for counterparty
- Simple UX: Just swap, no order management
- Permissionless listing: Any token can have a market
- Composability: Easy to integrate with other DeFi protocols
AMM Disadvantages
- Price impact on large trades: Slippage increases with size
- MEV vulnerability: Transactions visible in mempool
- Impermanent loss for LPs: Value extraction by arbitrageurs
Order Book Mechanics
Order books match buyers and sellers at specific prices, similar to traditional exchanges.
Order Book Advantages
- Better prices for large trades: Can execute against multiple price levels
- Price discovery: True supply/demand matching
- Professional tools: Limit orders, stop-losses, advanced order types
When to Use Each
| Scenario | Best Choice | Why |
|---|---|---|
| Small swap ($100-$10K) | AMM | Simple, immediate, low impact |
| Large trade ($50K+) | Order Book / Aggregator | Less slippage, better fill |
| Exotic token pairs | AMM | More likely to have liquidity |
| Major pairs (ETH/USDC) | Either / Aggregator | Deep liquidity in both |
Key Takeaways
- AMMs offer simplicity and always-on liquidity but suffer price impact on large trades
- Order books provide better execution for large trades and professional features
- Hybrid DEXs and aggregators combine both models for optimal execution
- Use aggregators to automatically route to the best venue
- Consider trade size, pair liquidity, and urgency when choosing