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Over the last decade, the paradigm shift towards digital payments has gained significant momentum — particularly as cryptocurrencies have evolved into a viable alternative. As we bridge decentralized finance (DeFi) and traditional finance (TradFi), the importance of on-chain solutions is becoming increasingly apparent.
Off-chain order books have traditionally functioned as a fundamental part of trade management, ensuring the integrity of trades. However, over time, the transition toward on-chain solutions for order books has marked a new milestone of improved security and transparency.
As traders opt more towards an open and transparent trading environment, the need for on-chain solutions has rapidly gained attention.
Off-Chain Order Books
Off-chain order books are used to manage transactional data externally, outside of a blockchain, before being finalized on the blockchain (on-chain). A long-since established method of managing trades, the off-chain handling of transactions has helped reduce costs and circumvent sluggish processing times.
Although off-chain order books have thus far been able to offer faster transaction times and smooth transactions for users, they also reveal a number of vulnerabilities. Because these off-chain processes are not on-chain, the risks of market manipulation, third-party involvement, and reduced transparency remain sky-high. When combined, these risks make transactions susceptible to fraud and cybercrime hacks.
The On-Chain Solution
Shedding the risks of off-chain order books, on-chain order books ensure transactions remain immutable on the blockchain, ensuring transparency in all trades. The shift to an on-chain order book solution ensures trader security while adhering to the fundamental principles of DeFi innate in blockchain tech.
Over the years, advancements in blockchain technology have made the on-chain order book experience significantly more efficient, overcoming previous transactional bottlenecks. This has led to improved transaction speeds and reduced costs associated with on-chain trading.
Poised as the solution to off-chain order book vulnerabilities, on-chain systems utilize well-coded smart contracts to ensure traders remain in control of their own assets. Built on the transparency of the blockchain, obscure transactions leading to bad actors carrying out fraudulent actions are eradicated.
Furthermore, the decentralized nature of the on-chain order books aids in avoiding the risks associated with centralization. In financial markets, centralized control can lead to market manipulation, privacy protection degradation, reduced user asset control, and a lack of transparency. On-chain solutions like Levana remove all of these associated risks.
On-Chain Systems In Action
Using on-chain order book solutions, users are only required to place a specified amount of their funds into a trade through smart contracts — maintaining a self-custodial process with improved security.
Some companies already employing these on-chain solutions include Osmosis, Injective, Sei, and Levana. Levana, for example, is a fully collateralized perpetual swaps platform that utilizes on-chain solutions to allow end-user verifiability of all transactions and operations.
Unlike its off-chain predecessors, Levana ensures all aspects of trade from execution to settlement stand immutable and transparent on the blockchain. Through on-chain order book utilization, Levana is able to provide users with a fully-collateralized and insolvency-risk-free trading platform — free from off-chain vulnerabilities.
Impact On The Industry
As focus intensifies on decentralization — and the risks of centralization — the adoption of on-chain order books and on-chain solutions continue to grow within the financial industry.
User trust is paramount to ensuring an industry can thrive, and the crypto finance industry is no different. Off-chain systems — and the inherent opacity concerns they give rise to — are steadily being phased out and repurposed.
The move on-chain, towards decentralization and transparent trade management, not only minimizes the vulnerabilities of off-chain order books but also helps stabilize market infrastructure. This more stable crypto market infrastructure facilitates more cost-effective systems to function alongside more robust security mechanisms being established for traders.
An On-Chain Future Outlook
An on-chain future, and the increasing adoption of on-chain solutions by platforms like Levana, give some insight into what kind of future the industry is heading towards. Using on-chain solutions, users can expect to witness more secure and transparent transactions — as the crypto space shifts away from off-chain reliance.
Not just a fad, the shift in sentiment that once favored off-chain solutions reveals a distinct change in traders’ outlook on an on-chain future. Increased focus on the fundamentals of DeFi — and the benefits it brings to user privacy and security — are starting to shine through via platforms like Levana.
By employing trustless blockchain technology, the risks of off-chain order books are set to become a footnote in the source code of an on-chain future. DeFi-optimistic traders are ready for such a future — are you?