Centralized Limit Order Book vs Automated Market Maker

None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.

The world of finance is undergoing a rapid transformation, fueled by the rise of decentralized finance (DeFi). One major distinction between DeFi and traditional finance lies in the way trades are executed. DeFi platforms primarily rely on Automated Market Makers (AMMs) to facilitate trading, while traditional financial markets use Centralized Limit Order Books (CLOBs). In this blog post, we will explore the differences between AMMs and CLOBs, the challenges of implementing CLOBs on blockchains, and why DeFi has tended towards AMMs.

Automated Market Makers (AMMs)

Automated Market Makers (AMMs) are decentralized protocols that facilitate peer-to-peer trading by using smart contracts on a blockchain. AMMs determine the price of assets based on mathematical algorithms and pre-determined rules. They remove the need for intermediaries, such as market makers, and allow anyone to participate in providing liquidity.


  1. Decentralized and permissionless: AMMs enable a more inclusive financial ecosystem that is not controlled by centralized authorities.
  2. Constant liquidity: AMMs ensure that there is always liquidity available for trading, as long as there are providers in the pool.
  3. Simplicity: AMMs streamline the trading process and make it more accessible for beginners.


  1. Slippage: Large trades can lead to significant price slippage, which can be disadvantageous for traders.
  2. Impermanent loss: Liquidity providers may experience losses due to price fluctuations of assets in the pool.
  3. Lower capital efficiency: AMMs generally require more collateral from liquidity providers compared to traditional market making.

Centralized Limit Order Books (CLOBs)

Centralized Limit Order Books (CLOBs) are the predominant mechanism for trading in traditional financial markets. A CLOB is an electronic list of buy and sell orders, organized by price level. Market participants place orders with a specific price and quantity, and trades occur when the buy and sell orders match. Centralized exchanges or trading platforms maintain the CLOB and facilitate transactions.


  1. Price discovery: CLOBs enable efficient price discovery through a transparent and open bidding process.
  2. Low slippage: Large trades can be executed with minimal price slippage, as long as there is sufficient liquidity.
  3. Capital efficiency: Traditional market makers can provide liquidity with less collateral compared to AMMs.


  1. Centralization: CLOBs rely on centralized exchanges or platforms, which may lead to a single point of failure and potential manipulation.
  2. Limited accessibility: Traditional financial markets often have barriers to entry, such as minimum capital requirements and strict regulations.

Challenges of Implementing CLOBs on a Blockchain

While CLOBs have several advantages in traditional finance, implementing them on a blockchain introduces unique challenges. The fundamental characteristics of blockchains, such as their decentralized nature and the consensus mechanisms they employ, can create obstacles that make CLOB integration difficult. Some of these challenges include:

  1. Scalability: Blockchains typically have limited transaction throughput, making it challenging to implement a CLOB with high-frequency trading and real-time order matching.
  2. Latency: The latency associated with blockchain transactions can impede the efficient execution of trades on a CLOB.
  3. Costs: The necessity of paying transaction fees to update orders on a blockchain-based CLOB can make it costly, particularly for traders who frequently modify or cancel their orders.

Why DeFi Tends Towards AMMs

The preference for AMMs in DeFi can be attributed to a combination of factors that align with the core principles of decentralization, accessibility, and innovation. AMMs offer a more straightforward approach to trade execution and liquidity provision that fits well within the blockchain environment. Here’s why DeFi tends towards AMMs:

  1. Decentralization: AMMs align with DeFi’s core principle of decentralization by eliminating the need for intermediaries and centralized control.
  2. Ease of implementation: AMMs are relatively simpler to implement on a blockchain compared to CLOBs, primarily due to their lower scalability and latency requirements.
  3. Inclusiveness: AMMs foster a more inclusive financial ecosystem by allowing anyone to participate as a liquidity provider or trader without barriers.


Both Automated Market Makers and Centralized Limit Order Books have their unique advantages and drawbacks. While CLOBs excel in price discovery and capital efficiency, they face challenges when implemented on a blockchain, such as scalability and latency issues.

On the other hand, AMMs align with the core principles of DeFi by promoting decentralization and inclusivity, despite potential downsides like price slippage and impermanent loss. Ultimately, the preference for AMMs in the DeFi space can be attributed to their ability to adapt to the decentralized and permissionless nature of blockchain technology.

As the DeFi landscape continues to evolve, it will be fascinating to see if new solutions emerge that combine the best aspects of both AMMs and CLOBs or if entirely new mechanisms arise to facilitate trading in this rapidly changing ecosystem.


Integral Insights


May 9th, 2024

Integral Insights April ‘24

The combined average daily volume across Ethereum and Arbitrum is now at 8.8 million USD, a remarkable 22% increase compared to last month.


April 25th, 2024

Introducing New Pool Analytics: Elevate Your Liquidity Provision Experience

A standout feature in our latest update is the "LP vs Hold" tab, which provides a comparative analysis of various holding strategies against Integral's LP positions.


April 1st, 2024

Integral Insights March ‘24

We achieved several important milestones, including a new all-time-high daily volume for Arbitrum and the addition of four new pools on the Ethereum mainnet.


March 4th, 2024

Integral Insights February ‘24

Another milestone was reached on February 21st when Integral processed over $2 billion in cumulative volume.


February 1st, 2024

Integral Insights: January ‘24

Our initial launch with the ETH-RPL pool was a success, quickly elevating us to the second most utilized liquidity pool for this pair’s trading.


January 17th, 2024

Is Liquidity Fragmentation Really That Bad?

When the token evolves into a store of value, it attracts outside traders, focusing on trading costs and slippage. This is when concentrated liquidity truly shines.


January 2nd, 2024

2023 Review

At Integral, our focus remains on developing a sustainable product for on-chain trading, serving both traders and liquidity providers.


December 12th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees on Ethereum Mainnet

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.


December 6th, 2023

Integral Insights: November ‘23

During November, Integral processed an average of approximately 6 million in volume with around 1.5 million in TVL. The system’s overall capital utilization sits at around 350%. It is the 10th most used DEX on Ethereum.


November 28th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.


November 15th, 2023

How Do University Blockchain Societies Gain So Many Votes?

Explore how university blockchain societies like FranklinDAO and Michigan Blockchain have grown into influential players in DAO governance, utilizing delegated votes and strategic partnerships to shape the future of DeFi protocols like Uniswap, Compound, and Aave.


November 6th, 2023

Integral Insight: October ‘23

We give an update for our work in October and highlight a profitable LP position from a long-term user.


October 26th, 2023

Understanding the Stakes in Lido’s Growing Share of Staked ETH

The community is arguing whether a protocol may have too much control over the Ethereum network. Lido controls a large percentage of staked ETH, which could have consequences for the network’s future security and neutrality.


October 14th, 2023

Changes to Staking and Farming

Looking back at our progress so far and to the future with new updates to staking and farming.


October 11th, 2023

Integral Insight: September ‘23

We give an update for our work in September with utilization going up on higher volume for our new pools.


October 11th, 2023

The Hottest Narratives of the Summer

What were the hottest narratives of the summer? Our DeFi research team delves into the growth of trading bots, RFV traders and more in this overview.


October 2nd, 2023

Uniswap Governance: A Deep Dive

Governance is considered a critical component for the decentralization and community-driven development of DeFi protocols. We take a look at one of the largest goverance ecostystems in DeFi, Uniswap. In this blog post, we'll discuss the landscape of Uniswap's governance, pulling data from empirical research to dissect the system's delegates and proposals, revealing some interesting findings.


September 19th, 2023

What is the DAI Savings Rate (DSR)?

Our research team takes a look at the DAI Savings Rate and its influence on various yield dynamics in DeFi.


September 15th, 2023

Integral Insight: August ‘23

We give an update for our work in August with cheaper gas fees and the launch of the Integral Relayer on Arbitrum!


September 7th, 2023

Integral Relayer Launches on Arbitrum

We are excited to announce the launch of the Atomic Relayer on Arbitrum. This will bring the efficient and tested system for atomic trades to the Arbitrum Layer 2 network!