The Return of the Order Book – How DEXs Have Come Full Circle

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These days, decentralized exchanges have become so popular that it’s hard to believe that the space barely existed only a few short years ago. According to DeFi Llama, DEXs are currently the most popular category of DeFi app by far, accounting for around a third of the total value locked and with the most number of operational dApps across all blockchain platforms. 

The space has grown thanks to the immense popularity of automated market makers, the smart contracts underpinning most decentralized exchanges. But while AMMs have fueled the meteoric growth in the sector, they come with some critical limitations that could hamper their future expansion into the global capital markets. Could up-and-coming new DEXs wielding a central limit order book be the solution? 

To understand the challenges inherent in DEXs, it’s worth taking a moment to reflect on their evolution up until this point. The desire for DEXs came about due to the many challenges and limitations facing centralized crypto exchanges. After the seismic hack of Mt.Gox in 2014 and following Ethereum’s launch in 2015, many in the crypto community were keen to explore non-custodial ways of trading crypto that didn’t involve having to trust a centralized entity with their funds. 

So around 2016, the first iterations of Ethereum-based DEXs, including dApps like EtherDelta and IDEX, began to emerge. However, they faced several critical issues, mainly a lack of liquidity. These exchanges used the same order book model deployed in centralized trading platforms, so they relied on a steady stream of orders to create liquidity.

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