Posted July 28, 2020 by Matt Taylor
Since our recent launch, we’ve had an overwhelmingly positive response from the DeFi community on their trading experience with Matcha, with over $50 million in cumulative trade volume. The most common question we’ve received is how Matcha surfaces better prices than individual DEXs and other aggregators. To answer this, we need to explore 3 components that Matcha uses under the hood. First, Matcha scans across all decentralized exchange (DEX) networks and individual market makers to find you the best price at that moment. Once the best price is identified, Matcha uses smart order routing to ensure your trade is completed in a quick, efficient manner. And finally, to further reduce transaction costs for traders, we employ meta transactions and gas tokens so you save on Ethereum gas fees.
All three of these functions happen automatically and are abstracted away so you can have a stress-free trading experience. This post dives into each of these aspects that contribute to better prices and explores how Matcha gives traders better prices not only compared to individual DEXs, but also to leading centralized exchanges.
DEX Aggregation & Smart Order Routing
Over the past few years, there has been a lot of experimentation in ways to build DEX networks. 0x uses an order book model similar to that of Coinbase/Binance, where buyers and sellers are matched peer-to-peer to determine the price of an asset. 0x’s model has worked well for larger trade sizes for popular token pairs. Protocols like Uniswap and Curve use an automated market maker (AMM) model where a pre-defined algorithm determines prices. AMMs have served long-tail token pairs well and function adequately for small trade sizes, but are not efficient as trade sizes increase. Kyber is an on-chain system where traders can tap into liquidity pools, known as reserves, to swap tokens. There is also a swarm of individual liquidity providers who have deployed off-chain request for quote (RFQ) systems that enable traders to connect directly with market makers to fill the total amount requested.
The bottom line is that there are a variety of exchange models, each with unique advantages and disadvantages. Wouldn’t it be great if there was an exchange that combined all the benefits? Enter DEX aggregation. Matcha aggregates all of these networks together in order to find the best price possible. Once the best rate is identified, Matcha’s order routing algorithm automatically splits transactions across these different DEXs to maximize the overall return for traders. We call this process smart order routing. You can learn more about how this algorithm works here.
It is analogous to how Expedia aggregates the best routes and prices from airlines to help travelers get the best deals. Matcha takes it a step further in the sense that it automatically executes a transaction once the best price is found, so users don’t have to worry about price hunting when they want to trade.
If you’re a developer interested in the inner workings of DEX aggregation, you can learn about how Matcha connects with 0x API. There are a growing number of DeFi projects that use 0x API for exchange functionality and continued access to the deepest liquidity sources available.
Meta Transactions & Gas Tokens
If you have used an Ethereum-based app recently, you have almost surely noticed that gas fees have increased substantially. We have been testing out a few different mechanisms to reduce fees for users so they can trade without having to worry about Ethereum network congestion. The first of which are meta transactions, also known as gas-less trades. Meta transactions, allow traders to interact with Ethereum without paying for gas fees, leading to a seamless trading experience because users no longer need to understand how blockchains work or the dynamics of the fee market. Meta transactions enable Matcha to sign and authenticate transactions on behalf of traders to pay for their gas fees.
We have also been experimenting with gas tokens, which allow us to harvest tokens and lock in low gas prices to be deployed when gas prices rise. It is important to note that we are not using these mechanisms on all trades. However, we encourage everyone to help us test out meta transactions and gas tokens so we can learn how we can use them long-term to improve the DEX trading experience!