How Do Limit Orders Function on an AMM-based Decentralized Exchange?
Limit orders on an AMM-based DEX are typically implemented using an external service or a specialized smart contract layer. Since the AMM itself only supports market-like swaps, the external service holds the user's tokens and monitors the AMM's price.
When the desired limit price is reached, the service executes a market swap on behalf of the user. This is an off-chain/on-chain hybrid solution, not a native AMM function.
Glossar
External Limit Order Service
Application ⎊ This service facilitates the integration of traditional trading mechanisms, specifically limit orders, into decentralized liquidity environments that natively support only market swaps.
Limit Order
Order ⎊ A limit order represents a conditional instruction to execute a trade at a specified price or better.
Limit Orders Function
Function ⎊ The primary function of a limit order is to specify a maximum acceptable acquisition price or a minimum acceptable disposal price for an asset or derivative contract.
Specialized Smart Contract
Logic ⎊ A specialized smart contract contains highly customized, deterministic logic designed to automate a complex financial function beyond simple token transfer.