Liquidity Pools

The Hybrid Liquidity Engine - Best of AMM Pools and Orderbooks

Introduction

Carbon uses a Hybrid Liquidity Engine that provide traders with the benefits of both Automated Market Makers (AMMs) and Central Limit Order Books (CLOBs). This is done by combining the liquidity provided by the Liquidity Pools with the order matching functionality of an order book.

Markets on Carbon therefore have tighter bid-ask spreads, better order execution, and quicker price discovery.

The Hybrid Liquidity Engine also gives rise to multiple benefits such as:

• Trading of markets without the need for a counterparty / external market makers;

• Enables traders to enhance their liquidity by leveraging liquidity pools, where anyone can contribute liquidity to the pools. The hybrid liquidity engine then uses the liquidity from the AMM and spreads it on both sides of the orderbook.

Automated Market Maker (AMM)

AMMs serve as high volume market makers that provide liquidity for multiple trading venues at a time while acting as intermediaries to mitigate the liquidity issue. This enables trades that would otherwise not have been executed in those markets

When a limit order is executed, the AMM engine uses the liquidity from the liquidity pool/vault to fill the order. If the liquidity in the pool/vault is insufficient to fill the order, the remaining portion of the order is placed in the order book and matched with other orders in the future.

Central Limit Order Book (CLOB)

Instead of relying solely on the AMM to match orders, the hybrid system also has an order book that allows traders to place limit orders at specific prices. These limit orders are stored in the order book until they are matched with a corresponding buy or sell order from another trader.