Off-Chain Orderbook

Aevo employs an off-chain orderbook for handling trading orders. This approach involves placing orders off-chain, which helps reduce latency and gas costs compared to an on-chain order system. The main advantage of this system is that it allows for quicker and more efficient order matching without incurring high transaction fees associated with on-chain transactions.

The off-chain orderbook works by maintaining a ledger of all buy and sell orders off the blockchain. Traders submit their orders to this off-chain ledger, where they are matched based on price and availability. Once a match is found, the order details are then submitted to the blockchain for settlement. This hybrid model leverages the speed of off-chain processes and the security of on-chain settlement.

On-Chain Settlement

Despite using an off-chain orderbook, all settlements on Aevo occur on-chain. This ensures transparency and immutability, leveraging the security of the Ethereum blockchain. When orders from the off-chain orderbook are matched, the corresponding trades are executed and settled on-chain using smart contracts. This process ensures that all transactions are final and tamper-proof.

The settlement process involves several steps:

1. Order Matching: Orders are matched off-chain based on price and availability.
2. Trade Execution: Once a match is found, the trade details are recorded off-chain.
3. On-Chain Submission: The trade details are then submitted to the blockchain for settlement.
4. Smart Contract Execution: The smart contract on the Ethereum blockchain executes the trade, transferring assets between the parties involved.
5. Transaction Finalization: The transaction is finalized on the blockchain, ensuring it is immutable and transparent.

On the AEVO documentation, the following example is provided to explain the ease of transactions:

Alice and Bob are trading an ETH call with strike price $2500. Price of ETH-03062022-2500-C is $2 per contract, and Alice buys 100 contracts from Bob.

Benefits of Off-Chain Orderbook with On-Chain Settlement

1. Reduced Latency: By handling order matching off-chain, Aevo reduces the latency associated with order processing, which makes the platform suitable for high-frequency trading.
2. Lower Gas Fees: Off-chain order matching minimizes the number of transactions that need to be processed on-chain, thereby reducing gas fees for users.
3. Transparency and Security: On-chain settlement ensures that all transactions are transparent and immutable, leveraging the security of the Ethereum blockchain.
4. Scalability: The hybrid model enhances scalability by offloading the order matching process to off-chain systems while ensuring secure settlement on-chain.

Risk Management

Aevo incorporates robust risk management protocols to protect traders and the integrity of the platform. These protocols include margin requirements, liquidation processes, and automated risk checks. The platform’s risk engine continuously monitors positions and collateral to ensure that all trades are sufficiently collateralized. In case of significant price movements, the risk engine can trigger liquidations to prevent losses from exceeding collateral.

Margin Requirements

Margin requirements help maintain the stability of leveraged trading. Aevo supports both standard and portfolio margin frameworks:

• Standard Margin: Each position must be fully collateralized according to predefined margin requirements. This ensures that traders have enough collateral to cover potential losses.
• Portfolio Margin: This framework allows for cross-margining, where collateral is shared across multiple positions. It provides greater flexibility and capital efficiency, as traders can leverage their collateral more effectively.

Liquidation Process

The liquidation process is initiated when a trader’s position falls below the required margin threshold. Aevo’s risk engine automatically identifies such positions and liquidates them to cover the outstanding liabilities. The liquidation process involves selling the collateral to cover the trader’s losses, ensuring that the platform remains solvent and other traders are not adversely affected.

Highlights

• Aevo uses an off-chain orderbook for efficient order matching, reducing latency and gas costs.
• All settlements occur on-chain, ensuring transparency and security through the Ethereum blockchain.
• The hybrid model enhances scalability and maintains high-frequency trading capabilities.
• Risk management protocols include margin requirements and automated liquidations.
• The platform supports both standard and portfolio margin frameworks for better capital efficiency.