ORBS Introduced TWAP For DEXes

Published on: 07.10.2022

ORBS introduced TWAP for DEXes. TWAP stands for Time Weighted Average Price protocol for DEX and AMMs.

Orbs pioneers the concept of L3 infrastructure, by utilizing Orbs’ decentralized network to enhance the capabilities of existing EVM smart contracts. Using Orbs validators as decentralized bidders. The project is introducing a new decentralized TWAP (Time Weighted Average Price) protocol for DEX/AMMs. It allows advanced time-spread trades to be executed on these platforms in a decentralized manner.

Intro to TWAP & Use-cases

TWAP (Time-Weighted Average Price) is common algorithmic trading. Executing strategy in CeFi that seeks to minimize a large order’s impact on the market. Dividing it into a number of smaller trades. Executing these trades at regular intervals over a specified period of time.

There are two primary benefits of utilizing TWAP trading strategies.

1. Price Impact Reduction

TWAP strategies reduce the impact of an order on the general market price. One scenario where price impact causes significant losses to traders is with large orders. Nonetheless, even smaller orders can suffer from price impact, particularly when the trading pair is long-tail and has low liquidity.

The problem of an individual trade having a disproportionate effect on the market, for either of these reasons, can be especially acute in DeFi where liquidity is much more fragmented than it is in the traditional financial markets. This fragmentation often exists even within individual dominant DEXs such as QuickSwap, which offer multiple pools for the same trading pairs.

Even TWAP strategies with relatively short durations (i.e., executing a trade in intervals of 1-2 minutes over a period of 15-20 minutes). It mitigates this problem by giving arbitrageurs a short window to close any price discrepancies on the affected pools. Bring the reserves back to equilibrium (on par with the spot price).

In addition to benefiting traders, this type of TWAP strategy also benefits the trading platform itself. It also minimizes the risk of price impact can lead to increased liquidity on the pool and thus increased trading volume.

2. Automation of Dollar-Cost Averaging (DCA)

Dollar-cost averaging (DCA) is an investing strategy. This is where the investor purchases an asset or set of assets having a certain dollar value on a specific schedule (i.e., on the first day of every month). The goal behind DCA is to average out abnormal market conditions and lessen the impact of volatility on the overall purchase.

In addition, TWAP trades can be used to generate an automated version of this strategy, typically by entering a market order with longer intervals that last for a longer period of time or even perpetually. This trade can essentially serve as an automated DCA bot that requires no additional action from the investor.

TWAP’s Contract Architecture and Design

While the benefits of TWAP transactions are clear, the current limitations of EVM smart contracts make them impossible to implement in a decentralized manner. Orbs’ L3 infrastructure solves this problem using the new TWAP protocol in a fully decentralized and secure way.

The TWAP smart contract architecture defines 2 actors:

Maker: User, the Order creator.

Controls all Order restriction parameters such as limit price, expiration, and the length of delay between chunks.

Taker: Incentivized independent participators that monitor Orders submitted by makers.

Takers try to find the best path for relevant chunks and submit bids for those chunks, including a fee for the taker.
Spends the effort needed to find the best path, and risks being out-bid in the bidding war by another taker with a better path or lower fee.

One honest taker (i.e., a taker who is willing to set the fee at the minimum amount needed to cover gas costs) is enough to ensure the entire system functions effectively at spot prices.

The TWAP Smart Contract does not hold any funds, has no owners, administrators, or other roles, and is entirely immutable once deployed on an EVM blockchain.

Powered by Orbs L3

The Orbs Network is an open, decentralized, and public blockchain infrastructure. Executed by a secure network of permissionless validators (known as “Guardians”) using Proof-of-Stake (PoS) consensus. Furthermore, Orbs are optimized to provide “L3” services. Working in conjunction with existing L1 and L2 layers and acting as a “decentralized backend”. Enhances the capabilities of EVM smart contracts. Orbs Network mainnet is live since 2019 and has dozens of active validators staked with over $100M.

The network provides its L3 services by operating as a decentralized serverless cloud. Allows developers to design applications that extend the capabilities of their smart contracts without relying on traditional centralized server solutions. These applications are deployed to be executed by the Orbs Guardians in a decentralized way.

In addition, as part of the TWAP protocol, Orbs Guardians will run a tailored function utilizing ORBS-Lambda. It will act as the single honest bidder, or “taker”, that requires for the TWAP protocol. Run optimally and achieve prices that track the spot market price as closely as possible.

The application run by Orbs Guardians will, in a decentralized manner, monitor the TWAP Smart Contract. When an order has been sent and a chunk is open for bids, Orbs Guardians will automatically calculate and submit an honest bid. Furthermore, the fee component of the bid will include only a request estimate for the estimate gas fees. In addition, the Guardians will determine the optimal path for the transactions using services such as ParaSwap API, or the DEX’s own router.

By automatically creating honest bids that are hardcoded to only specify a minimal gas fee and optimal trade path, Orbs Guardians will provide a strong level of assurance that the trades executed and the TWAP contract track spot market prices as closely as possible.