The debate between AMMs and order books defines modern crypto trading. Each model has distinct advantages. Understanding both helps you choose the right venue for each trade.
Order Book Model
Traditional model used by CEXes and some DEXes:
- Buyers and sellers post limit orders
- Orders matched when prices cross
- Requires market makers for liquidity
- Examples: Binance, dYdX, Serum
AMM Model
Algorithmic model used by most DEXes:
- Liquidity pools with token pairs
- Mathematical formula sets prices
- Anyone can provide liquidity
- Examples: Uniswap, Curve, Balancer
Comparison
| Factor | Order Book | AMM |
|---|---|---|
| Price Discovery | Market participants | Algorithm |
| Order Types | Limit, market, stop | Mostly market orders |
| Liquidity Source | Market makers | Liquidity pools |
| Capital Efficiency | High | Lower (V2), Higher (V3) |
| Decentralization | Often centralized | Fully decentralized |
When to Use Each
Use Order Books When:
- Need precise price execution
- Trading large volumes
- Want limit orders
- Low latency matters
Use AMMs When:
- Trading DeFi tokens
- Self-custody is priority
- Providing liquidity
- Permissionless access needed
Key Takeaways
- Order books offer precise execution and more order types
- AMMs enable permissionless trading and liquidity providing
- Both models are evolving and converging
- Choose based on your specific trading needs
- Many traders use both depending on the situation