Order Book vs AMM: How Polymarket Liquidity Works
A deep dive into the two major liquidity models in prediction markets: Why Polymarket transitioned from Automated Market Makers (AMM) to a Central Limit Order Book (CLOB).
When you trade on Polymarket, you are interacting with a highly sophisticated liquidity engine. Understanding the difference between an AMM (Automated Market Maker) and a CLOB (Central Limit Order Book) is essential for professional trading and managing your entry prices.
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Sign Up on Polymarket Now1. What is an AMM (Automated Market Maker)?
In the early days of DeFi and Polymarket, most markets were powered by AMMs. An AMM is a smart contract that holds a "pool" of liquidity. Instead of trading with another person, you trade against the contract.
How it works:
- Price is Math: The price is determined by a mathematical formula (e.g., $x * y = k$).
- Constant Liquidity: You can always trade, even if no other person is online, because the pool is your counterparty.
- Dynamic Pricing: As people buy "Yes" shares, the pool's ratio changes, and the price of "Yes" automatically goes up.
The Downside: Slippage Example
In an AMM, the larger your order, the more the price moves against you during the trade.
Example:
- Current "Yes" price: 50¢
- You want to buy $10,000 worth.
- Because the pool is limited, the first $1,000 might be at 50¢, the next $2,000 at 52¢, and the final $3,000 at 58¢.
- Your Average Entry: 54¢ (instead of the 50¢ you saw on the screen).
- This "loss" of value is called Slippage.
2. What is a CLOB (Central Limit Order Book)?
Polymarket has now transitioned to a CLOB for all major markets. This is the same model used by the New York Stock Exchange and Binance.
How it works:
- Peer-to-Peer: You trade against other people (or professional market makers).
- The Order Book: A list of all "Bids" (people wanting to buy) and "Asks" (people wanting to sell) at specific prices.
- Precision: You can specify the exact price you want to pay.
Detailed Example: The Order Book in Action
Imagine a market for "Will Bitcoin hit $100k by 2025?"
| Order Type | Price | Size | Note |
|---|---|---|---|
| ASK (Sell) | $0.72 | 5,000 | Lowest seller |
| ASK (Sell) | $0.71 | 2,000 | |
| MID PRICE | $0.705 | - | Spread: 1¢ |
| BID (Buy) | $0.70 | 3,000 | Highest buyer |
| BID (Buy) | $0.69 | 10,000 |
Scenario A: Market Buy If you want to buy 1,000 shares immediately, you "cross the spread" and buy from the lowest Seller ($0.71). You pay exactly $0.71 per share.
Scenario B: Limit Order You think 71¢ is too high. You place a Limit Order to buy 1,000 shares at $0.695. Your order sits in the book until a seller is willing to drop their price to meet yours.
3. Comparison Table: AMM vs CLOB
| Feature | AMM | CLOB |
|---|---|---|
| Who trades with you | Liquidity Pool | Other Traders |
| How price is set | Math Formula | Supply & Demand |
| Price control | None | You set it |
| Big order slippage | High | Low |
| Capital efficiency | Lower | Higher |
| Order types | Market only | Limit + Market |
4. Why the Transition Matters for You
Tighter Spreads
In the CLOB model, professional market makers compete with each other to offer the best prices. This narrows the "Spread" (the gap between buy and sell prices), saving you money on every trade.
Capital Efficiency
In an AMM, millions of dollars in liquidity might be "locked" in a pool but only a fraction is used for actual trades. In a CLOB, every dollar in the order book is actively looking for a match, leading to deeper liquidity for big traders.
Strategic Trading
With the CLOB, you can use Limit Orders. This means:
- No Overpaying: You never pay more than your limit.
- Automated Entry: Your trade executes while you sleep if the price hits your target.
- Price Discovery: You can see exactly where the market "walls" are (big buy or sell orders).
5. Summary: Which one is better?
For the vast majority of traders, the CLOB (Order Book) is superior. It provides the professional tools, lower costs, and price precision required for serious prediction market trading. Polymarket's move to a CLOB (specifically the Polymarket Order Book on Polygon) is what allowed it to scale to billions in volume during the 2024 election cycle.