Ordering Strategies for the DEx

It’s no secret that bitcoin miner fees have gotten more expensive, and that on days with large blockchain backlogs of unconfirmed transactions. Ways to insta-confirm DEx trades may be possible, but meanwhile, let’s look at different trading strategies using the DEx. Below fees are based on low mempool-size conditions, they may drop by half

  1. Whale Profit Tails – Someone who is investing in size in Omni Layer assets may have positions large enough that getting in and out is a tricky, and potentially very expensive proposition. Staggering orders over a range of prices can be a great way for a long-term inverstor or intermediate-term trade to optimize the average price received when exiting a position. A good way to figure what price increment to use between orders, would be to pick a range, say 110% higher to 130% higher, and lay 5-20 orders across even intervals in that range. One way to figure amounts is to consider equal dollar value proceeds at each increment, putting the largest amount of units up front to be bought first, reducing risk, while preserving total profit by selling slightly less at each higher price increment. Because there are no fees on the DEx for placing limit orders, this is the lowest-cost way to scale in and out of large positions. Use lower fees expecting confirmation in days or more, to spread more orders or save more on execution cost.

    Cost: 0.0001 BTC for 5 to 20 trades, ranging from 0.0005 BTC to 0.002 BTC

2. Market Maker Spreads – Look up an outside market with a centralized exchange, keep some trading capital on the open blockchain for DEx trades, and deposit some on a centralized exchange. Calculate prices where you could detect a  matching MetaDex trade, and then immediately take liquidity off of the orderbook on the centralized exchange. When prices move, cancel the trades and place new ones at newly calculated prices. When a match comes in, trade on the centralized exchange at the market. Having calculated match prices with a margin of profit after fees and slippage, earn a steady trading profit.

Cost: 0.0003 BTC x 2 + 0.0005 for the cancel, per cycle, 40 times a day,  use 0.5% or better profit-margin, needs a $5000 value position to trade at least twice a day in order to break even on miner fees. A saturated DEx would involve a number of such traders utilizing fee analysis and high-fee cancels, and matches hitting every block, with profit margins tightening to .1%.

3. Combination Spreads – Professional investors making markets across multiple exchanges and carrying inventory  can combine strategy 1 with strategy 2 to achieve the goal of price-range distribution/accumulation of large, illiquid positions in some assets, and save money for strategy 2, in that many potential matches could occur with cheaply placed orders that were transmitted many blocks earlier. Also, funds that work with 50-100k or more on such a strategy would accumulate a 30-day average volume on centralized exchanges that could entitle them to lower maker fees on that side of the books, enabling them to provide tighter spreads, making the 4th strategy more accessible to everyone.

    4. Liquidity Taking Arbitrage – As markets get deeper, there will be opportunities to buy potentially large blocks of an asset while simultaneously trading it off at better prices on a centralized exchange. These orders will likely become competitive, in that within the same block confirmation time, multiple traders will try and match the order. Increasing miner fees to 0.0007 or as much as 0.0012 makes sense here, once fees are active a 0.05% taker’s fee will also be deducted from the proceeds of the trade. Maybe the objective is to hold the resulting asset, taking advantage of a favorable price, or maybe one is aiming for accumulation by selling it on one market and buying it back more cheaply on another.

Cost: 0.0007 BTC + 0.05% of the trade proceeds

5. Triangular Arbitrage  – Because the DEx permits total free in what pairs trade against, creating exponential possibilities as the number of asset grows, one can combine strategy 2 with strategy 4 by looking at triangular arbitrage opportunities. If I can take liquidity to buy MAID with OMNI, then sell MAID for USDT, and end up with more USDT than I would have selling OMNI, then it’s a reasonable move to take liquidity on both markets. A trading system based on this could provide limit orders to hedge on centralized exchanges when they are matched, or take the opposite approach, scanning the blockchain for order chains that would enable a profit after 0.05% is deducted twice, and after 0.0014 BTC is paid in miner fees for fast confirmations. Therefore, the total triangular arbitrage value should be at least a 0.2% on a (based on current BTC prices) $1700 valued order, or larger amounts for arbitrages worth between 0.1% and 0.2%.

Cost: 0.1% + 0.0014 BTC

These 5 strategies cover the elemental basics of decentralized exchange trading, but if you have any other ideas, please share in the comments.









Ordering Strategies for the DEx