Request-for-Quote (RFQ)
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Request-for-Quote (RFQ) is an electronic notification sent to market makers expressing a trader's intention to trade a specific instrument or strategy
12. It is a mechanism commonly used for large-sized, privately negotiated transactions, often referred to as block trading
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How the RFQ Process Works
In a decentralized finance (DeFi) or electronic trading environment, the RFQ process typically follows three steps:
- Request Price Quotes: A user defines parameters such as the asset, amount, and timeframe. This request is sent to a smart contract or platform, which then routes it to available market makers or dealers 32.
- Pricing: Market makers receive the notification and submit encrypted bid and ask prices back to the system 13. These quotes are aggregated for the user to review 3.
- Execution: The user selects their preferred quote, and the transaction is executed directly with the chosen dealer 3. This results in an on-chain trade confirmation 3.
Benefits of RFQ
- Reduced Market Impact: By negotiating privately, traders can execute large orders without disrupting the open market or causing extreme price changes 12.
- Price Efficiency: Users can receive competitive, two-way quotes from multiple market makers simultaneously 2.
- Transparency and Control: The process allows for decentralized price discovery while maintaining a verifiable on-chain transaction history 3.
- Security: In DeFi, the use of smart contracts ensures an automated and trustless communication channel between users and dealers 3.
Market Adoption and Trends
RFQ mechanisms have seen significant growth in the cryptocurrency ecosystem:
- Transaction Dominance: RFQ transactions grew from a 29% share in July 2022 to 71% by September 2023 4. By Q2 2024, they accounted for 70% of transactions on tracked pairs 5.
- Volume Growth: RFQ trading volume reached record heights of 80% dominance in the final week of Q4 2023 6. In Q1 2024, RFQ volume jumped 83% quarter-over-quarter 7.
- Common Trading Pairs: RFQ systems are frequently used for highly traded pairs such as USDC-WETH, USDT-WETH, USDC-WBTC, WBTC-WETH, and DAI-WETH 754.
Access and Requirements
RFQ systems are often geared toward institutional or high-net-worth investors. For example, some platforms require a minimum account balance of $10,000 to participate in block trading
12. Minimum trade sizes for RFQs can range from $10,000 for spot trades to $50,000 for other instruments
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