Gnosis Protocol is a fully decentralized trading protocol currently challenged with attracting liquidity. Takers only see a sparsely populated orderbook and makers are effectively prohibited from taking part due to the costly nature of constant on-chain order submissions. We propose a solution that would implement a service on top which requires makers only to submit an order on-chain when there is likely a trade happening, whilst the taker is able to see that quote already beforehand and include it in a decision for their limit order. This will not influence GP’s decentralized nature in any way.
Any two sided market platform - such as GP, where buyers and sellers are matched - must overcome the initial liquidity problem for relevant network effects to take off and the platform to be a success. In short: liquidity attracts more liquidity.
After talking with several market makers about the inactivity on GP since its launch mid-April, the response was quite clear: market making on the entirely on-chain protocol is extremely expensive due to re-adjusting orders every batch with an unclear success rate whether orders are matched, which is mainly due to the absence of takers coupled with the high and rising gas prices.
One of the core challenges of GP is to bring maker and taker together at the same time/ the same batches. The suggestion by Protofire discussed here for a simple swap interface addresses the critical user experience for a taker (which are needed for makers). However, another service would additionally be required, namely a way to show these swap-traders available market makers’ offers without the cost and inefficiency of doing it all on-chain. Both proposals would complement each other to solve this “chicken-and-egg” problem.
We suggest integrating an off-chain orderbook (or “virtual” orderbook) into Mesa’s on-chain orderbook and the price estimation service. Important to note is that this will not influence the decentralized nature of Gnosis Protocol, which is one of its core features: order submission, matching, settlement etc. will all remain on-chain. The core difference is that a user will see more orders in the orderbook (those on and off-chain) and can make an informed decision on placing a limit order. Once the user has submitted their order, the market maker will be informed and in turn place their order on-chain if the user’s decision was made based on an off-chain quote.
Worst case scenario for the user is that their order is not filled. Best case scenario is that many more offers are available and the traders find a match (at a better price). They might still be matched against better offers in the same batch: single price clearing and optimizing for traders’ welfare is still intact.
Call for action: Discussion
As the dxDAO hosts Mesa and adds significantly to the decentralization of Gnosis Protocol, we would love to hear thoughts and discussions around the addition of an off-chain orderbook service.
(1) Would you be interested in including this on Mesa (and possibly on the simple swap interface if that goes forward)?
The implementation of the service on Mesa could take many ways: A user could switch the service on and off or be exposed to it without explicit consent (but noting the existence).
(2) Would you be able to either build the adaptation to Mesa yourselves or would be keen to fund it? We (=Gnosis Ltd.) would dedicate our development resources in building this backend service if it sparks members’ enthusiasm and likewise commitment.
(3) For more detailed documentation and the technical implementation details, please see this document. We are also interested to hear thoughts and feedback on this proposed technical back-end implementation (you can also comment into that document directly).