5.5. Market incentives

The privacy and immediacy granted by the aforedescribed Sequentia DEX compared to a centralized exchange can be factored in the order packages, expressed by the priceRange parameter. That is, even if it is cheaper to trade on a CEX, a DEX has added value.

When liquidity is low, professional traders will grab all maker offers with large enough spread relative to CEX prices. When liquidity is high, the mark-up will be enticing enough to incentivize new market operators to join the business, lowering the premium required to fulfill orders.

To elaborate, let us say a user broadcasts an order on the DHT, which also expresses the “priceRange” parameter, a percentage of deviation from the limit price defined in the order, which increases the possibility of finding a suitable match. Specialized entities (which we may call “liquidity providers”) can always inspect the DHT to discern speculatory opportunities by fulfilling orders on the DEX since they can profit from arbitrage between DEX and CEX prices.

Once a new order appears, the liquidity provider can connect to the corresponding user and offer a symmetric order with a limit price within the priceRange of the DHT order, but with a more convenient price ratio (for the liquidity provider) compared with a centralized exchange.

Suppose the DHT order book’s trading pairs are expressed in a token listed on major centralized exchanges (such as BTC or a stablecoin). In that case, it is plausible that liquidity providers will always have enough tokens to fulfill the match as they can instantly buy them on a centralized exchange using the Lightning Network.

Assuming that liquidity providers already have channels entering or exiting centralized exchanges for all RAS tokens with high liquidity, they will likely develop BOTs that would query prices and orders on the DHT and simultaneously operate DEX and CEX to profit from the arbitrage opportunities faster than competitors.

In short, users buying assets on a DEX pay a premium over the same type of trade done on a centralized platform. In exchange, they maintain complete privacy, do not need to pass KYC/AML procedures, deal with legislation and authorities, or trust any third-party custodian service.

Liquidity providers allow users to find a match for their orders immediately. In return, they can speculate by leveraging that premium and simultaneously operating on DEX and CEX through the Lightning Network. Competition between liquidity providers lowers the premium paid by users.