DeFi Trades vs OTC
Over-the-Counter (OTC) trades avoid the costs of using decentralized exchanges. True Freeze decentralizes OTC.
Last updated
Over-the-Counter (OTC) trades avoid the costs of using decentralized exchanges. True Freeze decentralizes OTC.
Last updated
When people sell ETH for USD on an exchange like Coinbase or Binance, they have a target price (e.g., $2,000), but because others are buying and selling concurrently, the market price is always changing. It is possible that during a trade the price changes (e.g., $1,998) and they get less USD than expected. This is called slippage. Also when selling ETH, others will notice and possibly join in the selling. This is called price impact. The act of buying/selling changes the market price. Also the exchange charges Maker and Taker fees for their own revenue. These fees often get reduced the more you use an exchange (e.g. starts at 0.5% and goes down to 0.05% for repeat customers). In this off-chain world, the ways to avoid these fees are to find your own buyer. Over-the-counter (OTC) desks allow people to do private sales (no price impact) at a set price (no slippage) for lower or fixed fees. In the on-chain DeFi world, the vast majority of trades happen on automatic market makers (AMMs) like Uniswap where people contribute to a liquidity pool and people pay fees to trade any asset at any time without any specific counterparty.
These AMM trades have similar problems to central exchanges. Here: 1. $10,000 worth of USDC is being traded for ETH 2. The expected result is $9,975.99 ($24 value loss including Uniswap LP fees) 3. The going rate at the time of trade was 1 ETH = 1,213 USDC 4. The price impact was very small (-0.01%) because $10,000 is not a very big trade and the liquidity pool is deep. 5. Because transactions on blockchains are grouped into blocks, you have to set an acceptable amount of slippage ahead of time because others making the same trade in the same block can go in front of you changing the price. Here, a 0.50% loss is set as acceptable. 6. The transaction fee for Ethereum at this time was roughly $12. Using 1 ETH = 1,213 USD the expected result is $9,975.99 of ETH. The worst case scenario is 8.20185 ETH which would be $9,948.84 not counting the network fees. True Freeze seeks to provide a structured alternative for getting the benefits of OTC (no price impact, no slippage) in a decentralized way. Specifically by allowing anyone to create denominated Freezer NFTs that represent deposited ETH. This turns every NFT marketplace in DeFi into a decentralized OTC desk. People can see Freezer NFTs, know the amount of ETH they represent, make bids (both in ETH for pricing time-preference and non-ETH acting as limit-orders) and eliminate price impact & slippage. These are the core innovations of True Freeze. Of course, many NFT Marketplaces charge high fees (e.g., 2 - 2.5%) which doesn't work for DeFi NFTs. But there are already several fixed & lower fee marketplaces that are cheaper than these costs and long-term NFT marketplace fees will fall as competition rises, for example nft.org which charges a fixed 0.001 ETH fee on buys - much friendlier to DeFi-NFTs.