An Order Book is a record of all the orders placed by traders (also called market makers) at their preferred prices to buy or sell an asset.
Market Makers on an exchange are traders who don't trade at the current market price and are willing to wait and pay a fixed price for an asset. The various orders (price & quantity) specified by these market makers constitute the Order Book.
Market Takers on the other hand are traders who want to trade right away at the current market price.
We're going to use two fictional people as an example, Rita and Arnold.
Rita and Arnold use the Cryptosasa exchange to trade KES for BTC
Let's pretend that the CryptoSasa Order Book currently looks like this:
Rita has KES 100,000 to spend and would like to buy some BTC.
The minimum amount of Bitcoin Rita wants to buy is 1 BTC, which means she would need to trade at a price of KES 100,000 = 1 BTC to get what she wants.
Rita is willing to wait for the market price of BTC to change and thinks there is a chance that the price of BTC will arrive at KES 100,000 = 1 BTC in the future, so she places an order to buy 1 BTC for KES 100,000 on the CryptoSasa Order Book.
The current market price of BTC is higher than KES 100,000 so this trade won't happen right away because there are other people who are willing to accept less than 1 BTC for KES 100,000.
Some time passes and the price of BTC moves down to close to KES 100,000 = 1 BTC. Arnold has BTC and he wants to trade his BTC for KES right away.
He likes the price that Rita is offering to buy BTC from him, so he accepts the trade and matches Rita to swap KES 100,000 for 1 BTC.
Arnold becomes the taker of the trade because he wants to trade now and matches Rita to make sure his trade happens right away.
CryptoSasa then matches Rita and Arnold and they swap the KES and BTC at the price they have agreed on.
The Order Book you see on the CrypoSasa Exchange is a set of offers that people like Rita (called "makers") have submitted to buy or sell cryptocurrency.
When Arnold comes onto the exchange and wants to accept an offer by Rita, a trade will take place at the best available price for Arnold.
Arnold in this particular trade becomes the "taker" of the already existing orders by Rita and pays a fee to CryptoSasa to complete the trade.
If multiple orders for the same price exist, these are prioritized on a first-come, first-served basis (earliest order is filled first). This process is repeated until no more trades are possible.
An order that has not matched can be stopped at any time, at which point in time it is removed from the Order Book.
An order may end up in one of three states:
- Unfilled: the order was unable to be matched at all by the time it was stopped.
- Partially-filled: a portion of the total volume of crypto was matched between buyer and seller before it was stopped.
- Filled: the order is completed for the total volume of crypto purchased or sold.
Let’s quickly review how the CryptoSasa Order Book works:
- A maker creates a new order that no one else on the Order Book will immediately accept to trade (they are willing to wait to trade).
- A taker creates a new order that matches an order that already exists on the Order Book, which completes a trade (they want to trade right away).
- The taker pays a fee to complete the transaction, while makers are paid to trade on CryptoSasa.
- Orders can be cancelled at any time before the trade is completed.
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