dTWAP Protocol
What is dTWAP?
TWAP (Time-Weighted Average Price), also referred to as DCA (Dollar Cost Average), is a common algorithmic trading executing strategy in CeFi that seeks to minimize a large order’s impact on the market by dividing it into a number of smaller trades and executing these trades at regular intervals over a specified period of time.
Typical Use-cases:
There are two primary benefits of utilizing TWAP trading strategies.
1. Price Impact Reduction
TWAP strategies reduce the impact of an order on the general market price.
One scenario where price impact causes significant losses to traders is with large orders. Nonetheless, even smaller orders can suffer from price impact, particularly when the trading pair is long-tail and low liquidity.
The problem of an individual trade having a disproportionate effect on the market, for either of these reasons, can be especially acute in DeFi where liquidity is much more fragmented than it is in the traditional financial markets. This fragmentation often exists even within individual dominant DEXs such as QuickSwap, which offer multiple pools for the same trading pairs.
Even TWAP strategies with relatively short durations (i.e., executing a trade in intervals of 1-2 minutes over a period of 15-20 minutes) can mitigate this problem by giving arbitrageurs a short window to close any price discrepancies on the affected pools and bring the reserves back to equilibrium (on par with spot price).
In addition to benefiting traders, this type of TWAP strategy also benefits the trading platform itself, as minimizing the risk of price impact can lead to increased liquidity on the pool and thus increased trading volume.
2. Automation of Dollar-Cost Averaging (DCA)
Dollar-cost averaging (DCA) is an investing strategy where the investor purchases an asset or set of assets having a certain dollar value on a specific schedule (i.e., on the first day of every month). The goal behind DCA is to average out abnormal market conditions and lessen the impact of volatility on the overall purchase.
TWAP trades can be used to generate an automated version of this strategy, typically by entering a market order with longer intervals that lasts for a longer period of time or even perpetually. This trade can essentially serve as an automated DCA bot that requires no additional action from the investor.
A User-friendly, Customizable UI
In addition, the Orbs team has designed a specialized UI that can be easily integrated and customized by any DEX, to create an intuitive, user-friendly and informative way for users to set the parameters for and initiate dTWAP trades.
dTWAP trades can be divided into market orders and limit orders. In a market dTWAP order, the trader sets parameters, the size of the desired trade, the total duration of the strategy, and the intervals between individual trades. The trades are then executed at the predetermined intervals at the best available current market price.
Limit orders are similar, except that in these strategies, the trader sets a limit on the price at which trades will be executed. If a price within the limit is not available at a given interval, the individual trade will not be executed. In this version of the strategy, the larger total order may only be executed partially by the end of the duration period.
The dTWAP UI has 3 basic parameters which the user needs to specify:
Duration: the total time during which the total amount of individual trades making up the full dTWAP order may be executed.
Trade Size: the user can set the size of each individual trade. The UI then automatically calculates the total number of trades that will be needed to complete the full order, the est and the trade interval.
Trade Interval: sets the amount of time between each individual trade. The user can elect to edit this, which will automatically result in corresponding changes to the trade size and number.
These parameters allow for a lot of flexibility for the user when placing the order, to take into account factors such as market conditions, current gas fees, etc. Once all of these parameters are set, the user will have the ability to Approve the specific source token and place the order.
dTWAP’s Contract Architecture and Design
While the benefits of dTWAP transactions are clear, the current limitations of EVM smart contracts make them impossible to implement in a decentralized manner. Orbs’ L3 infrastructure solves this problem using the new dTWAP protocol in a fully decentralized and secure way.
Maker: User, the Order creator.
Controls all Order restriction parameters such as limit price, expiration and the length of delay between chunks.
Taker: Incentivized independent participators that monitor Orders submitted by makers
Takers try to find the best path for relevant chunks and submit bids for those chunks, including a fee for the taker.
Spends the effort needed to find the best path, and risks being out-bid in the bidding war by another taker with a better path or lower fee.
One honest taker (i.e., a taker who is willing to set the fee at the minimum amount needed to cover gas costs) is enough to ensure the entire system functions effectively at spot prices.
The dTWAP Smart Contract does not hold any funds, has no owners, administrators or other roles and is entirely immutable once deployed on an EVM blockchain.
The entire process is described in the following flow chart:
Powered by Orbs L3
As part of the dTWAP protocol, Orbs Guardians will run a tailored function utilizing ORBS-Lambda that acts as the single honest bidder, or “taker”, that is required for the dTWAP protocol to run optimally and achieve prices that track the spot market price as closely as possible.
By automatically creating honest bids that are hardcoded to only specify a minimal gas fee and optimal trade path, Orbs Guardians will provide a strong level of assurance that the trades executed and the dTWAP contract track spot market prices as closely as possible.
Last updated
