Traditional financial exchanges have relied on centralized trade matching engines and settlement layers to facilitate the exchange of assets between buyers and sellers. However, the rise of blockchain technology has paved the way for decentralized exchanges (DEXs), which aim to provide a trustless and transparent platform for trading digital assets.

DEXs operate using on-chain order books or server-side order book models, each with its own trade-offs in terms of speed, fees, and censorship resistance. Early DEX implementations, such as EtherDelta, required users to deposit assets into a contract before trading, mimicking the deposit and withdrawal model of centralized exchanges. While these limit order book DEXs initially offered the advantage of no KYC requirements and low fees, they faced challenges like high transaction costs for order management and relatively slow execution speeds.

As an alternative to order books, automated market makers (AMMs) have emerged as a different mechanism for price discovery and trade execution within DEXs. By employing smart contracts to facilitate non-custodial trade settlement, DEXs enable users to retain control over their assets while participating in a decentralized trading environment driven by transparent price discovery and trade matching algorithms.

The adoption and trading volume on DEXs have witnessed significant growth, indicating an increasing demand for decentralized trading platforms. Notably, the inherent transparency of DEXs, where trades are recorded on the blockchain, may provide a more accurate representation of trading volume compared to centralized exchanges, which are often plagued by issues like wash trading.

As the DEX ecosystem continues to evolve, research efforts are underway to address challenges such as wash trading detection and further enhance the security, efficiency, and decentralization of these platforms. Platforms like Messari and Nansen allow tracking of assets across exchanges, both centralized and decentralized to determine the direction of the markets.