Article by Jake and Stake Edited by Hiro Kennelly and Frank America Cover art by Tonytad

With the rise of cryptocurrencies we’ve seen a wave of centralized entities that have capitalized as bridges that connect the fiat world to the blockchain world. As time has progressed, they’ve transformed into centralized exchanges (CEXs) that give users access to a variety of cryptoassets.

By nature of being centralized, CEXs are fast, can provide a variety of different financial products, and have sleek user interfaces and user experiences. 

CEXs use central limit orderbooks (CLOBs) to create deep liquidity for the financial assets. Users submit orders to buy or sell an asset at a specific price or better, called limit orders. A CLOB is a system that matches these overlapping limit orders to facilitate trades.

CEXs are appealing to users because they offer and have easy-to-use fiat on/off ramps, deep liquidity, and low fees. For CEXs, maximum efficiency is the key to success.

However, the risks inherent to these centralized entities are those of control. One only needs to remember the FTX disaster to understand why centralized entities are dangerous. FTX promised to keep user funds safe. FTX promised to leave user funds untouched. But FTX did none of this and instead used tricky (and not so tricky) methods to steal user funds and direct them to the personal accounts of FTX executives and an irresponsible trading firm that subsequently lost nearly everything but a pile of worthless FTT tokens.

Despite these risks, CEXs still dominate crypto trading volume, with 90% of spot and derivative volume occurring on centralized exchanges.

But with blockchains comes transparency, and a new application of this technology has arrived on the scene: Decentralized Finance. No need to trust a third party. All funds are controlled by you. All decisions are made by you. You have full self-sovereignty of your assets and your financial future.

Decentralized Finance (DeFi) is a nascent, but growing ecosystem of financial applications without the dangers of the principal-agent problem. Users can lend, borrow, and trade a wide variety of assets on crypto-economic rails. In fact, the number of assets available to DeFi users is an order of magnitude greater than the largest centralized exchanges.

Although these assets often have low liquidity, AMMs like Uniswap can provide a more efficient market for this “long tail” of assets than a CLOB.

DeFi offers anyone with an internet connection access to sophisticated financial products and self-sovereignty, but DeFi has trade-offs. Take exchanges. Compared to CEXs, DEXs are slower, have fewer derivative products, and have worse UX/UI.

Consensus mechanisms create a process for determining trust between multiple independent parties, and this process requires more time and money than centralized platforms. Whether they use proof-of-work or proof-of-stake, crypto protocols take time to decide what is legitimate and what is not. This is one of the fundamental trade-offs between centralized applications and decentralized platforms.

DeFi applications are separated from each other. Compound offers decentralized lending, Uniswap offers decentralized exchanging, and Perpetual offers decentralized perpetual swaps. While the modularity improves the innovation of each product, the fact remains that they are isolated from each other. Information from one service cannot be utilized by another.

Cross-margining is one example. Cross-margining sums a user’s collateral and used margin from multiple accounts so traders don’t have to manage each account individually. The current environment makes cross-margining completely inefficient or severely lacking and creates capital inefficiencies that don’t exist in centralized finance.

Additionally, there is still too much friction in DeFi compared to the seamless experience of web2. Where CeFi offers multiple products in one smooth product experience, DeFi cordons off each product from one another. Users have to switch between one product to another, confirming transactions and tracking positions across each of them.

Put simply, the number of clicks is much higher, and the risks are much greater. In the frictionless online world, convenience matters. What DeFi needs is a protocol that combines the user experience of CeFi with the self-custody of DeFi. Enter Vertex. 

Built on Arbitrum, Vertex seeks to solve the problems of CEXs and maintain crypto values like self-custody, transparency, and self-sovereignty.

Vertex is “One DEX to rule them all” and offers a variety of products and features:

• Spot exchanges

• Perpetuals swaps

• Lending markets

• Fiat on/off ramps

• Universal cross-margining

Additionally, Vertex is built on Arbitrum, a Layer 2 scaling solution, and implements a hybrid orderbook model. As a result, Vertex settles transactions at speeds on par with CEXs, far faster than L1 Ethereum.

Vertex also lets users trade, earn, and borrow with the non-custodial and transparency of blockchain, the wide variety of assets on DeFi, and the speed and performance of centralized exchanges.

Vertex has created a hybrid orderbook-AMM that will combine the best of both solutions. This hybrid model is composed of three distinct parts:

• An off-chain orderbook that tracks limit orders sent to Vertex

• An on-chain AMM that supports the long-tail of crypto assets and lets users provide passive liquidity

• An on-chain risk engine that routes orders to whichever of the above liquidity sources is cheaper without taking custody of funds

Vertex uses a CLOB in conjunction with an AMM to offer 10–30 millisecond transactions, low slippage, and tighter spreads. Users have access to both sources of liquidity, and trades can fill against the orderbook or AMM to get the best possible price.

The on-chain Arbitrum contracts support spot and perpetual swaps, and like other DeFi lending markets, smart contracts handle all liquidations permissionlessly.

To access the sequencer, users can call the Vertex API (called EDGE). The sequencer exists as a price improvement tool.

The sequencer will check the prices found in the orderbook and the AMM and execute the trade at the best price. The order will be partially executed across whichever liquidity pool offers the best price, and the sequencer will continue to compare prices until the order is complete. Take the following example from the Vertex documentation:

1. ETH-USDC pair trading at $1,200.

2. Alice (trader) is looking to market buy 75 ETH.

3. Alice sets her max slippage to 1%.

4. There is 25 ETH worth of asks on the orderbook at a price of $1,200.

5. Therefore, ⅓ of the trade is filled at $1,200.

6. The next set of asks (50 ETH worth) is sitting at $1,210.

7. However, there is 25 ETH worth of LP positions sitting between $1,200 — $1,210.

8. The next ⅓ of the trade is purchased from LP positions and filled at a price range of $1,200 — $1,210.

9. The last ⅓ of the trade is executed at a price of $1,210, buying up 25 out of the remaining 50 ETH at that price.

The sequencer has no ability to censor transactions or withdrawals because the AMM can handle any transactions that are not processed by the off-chain orderbook. Users can always directly access the on-chain contracts; the sequencer is simply icing on the cake.

As noted previously, one advantage of using CEXs is the ability to leverage your assets and positions across multiple accounts. In other words: universal cross-margined accounts.

Cross-margining improves capital efficiency by allowing users to reduce their margin requirements and improve risk management. Traders can take opposing positions in two different accounts and maintain beta neutrality if they choose.

Cross-margined accounts can also help traders avoid liquidations by calculating the collateral for the multiple accounts using total assets available. For example, a user on Vertex can open a long ETH spot margin position alongside a short BTC perp position without manually transferring margin between the accounts to maintain the required margin levels — everything is performed automatically and displayed on the portfolio page.

Vertex’s singular UI allows users to easily track and manage their positions, which is particularly useful during periods of volatility and reduces difficulty across multiple margin accounts for several applications.

The ease of management affords traders the opportunity to implement complex strategies. One such strategy includes capitalizing on the price difference between two financial products: spot assets and perpetual contracts. If you’re an advanced trader, you’ve heard of these “basis trades” and the opportunities they present.

If users want to basis trade, they typically have two paths:

• Use several different products, one for spot and one for perpetuals, and miss out on the capital efficiency of sharing margin across both positions

• Use a centralized exchange and expose yourself to the risks of censorship and asset seizure

But there’s a third path with Vertex. Vertex offers both spot and perpetual products, allowing traders to enter, monitor, and exit these positions in one place without the dangers of centralized exchanges.

Universal-margined accounts grant traders tremendous flexibility. You can deploy your capital across multiple accounts and spread your risk across all of them. And because Vertex is built on Arbitrum, it’s easy to enter basis trades at the low costs of centralized exchanges with the transparency and immutability of DeFi.

In an effort to improve user experience, Vertex offers some of the lowest fees in DeFi. There are no maker or taker fees, which is comparable to most CEXs.

Remember to take care when using margin. Access to margin is a privilege, and should be used cautiously. You can learn more about Vertex’s Universal Cross-Margined Accounts here.

Vertex uses an on-chain AMM for trades but with an off-chain orderbook. Their matching engine and off-chain orderbook (sequencer) use the AMM’s liquidity to achieve tighter spreads, lower slippage, and deeper liquidity than any single product alone. Vertex offers:

• Spot trading

• Perpetual swaps

• Money markets

• Fiat on/off ramps

• Universal cross-margining

• An SDK for easy integration with other DeFi apps

In addition to increased price accuracy, Vertex offers some of the best fees and user experiences in decentralized finance, and users get:

• 10–30 millisecond transactions

• Deep liquidity

• Low slippage

• Tight spreads

Vertex gives traders the fees and speeds of CEXs, but with the transparency and self-sovereignty of DeFi. For product updates follow Vertex on Twitter, join their Discord, and try it out on the Arbitrum Goerli Testnet.

No more sacrificing control for better features and performance. It’s time to bring the advantages of CEXs on-chain with Vertex.

Thank you to Vertex for sponsoring this post.

Author Bio

Jake and Stake is a writer and editor at BanklessDAO. He is the former Writers Guild’s Governance Coordinator and runs the DeFi Download newsletter, with a background in software engineering and cybersecurity.

Editors Bios

Hiro Kennelly is a writer, editor, and coordinator at BanklessDAO and the Editor-in-Chief at Good Morning News. He is also helping to build a grants-focused organization at DAOpunks.

Frank America is an author, researcher, comedian, and musician. Frank is a co-founder of The Rug News, and content manager at Bankless Publishing.

Designer Bio

Tonytad is a graphic designer who has worked locally and internationally with organisations and firms on over 200 projects, which includes branding, logo, flyers, cards, and covers

BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.

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This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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