Elgar Encyclopedia of Cryptocurrencies, Blockchain and DLT

In this chapter, we cover the historical and ongoing efforts towards implementing a “decentralized” exchange in a permissionless blockchain. Early efforts at implementing central limit order books (CLOBs) on-chain faced significant computational limitations, resulting in high costs and inefficiencies. Automated market makers (AMMs), primarily constant function market makers (CFMMs), proved an elegant solution to the issue of computational limitations but introduced new problems such as impermanent loss (IL) and maximal extractable value (MEV). Recently, so-called “app-chain” architectures with tailored implementations optimized for single applications, like CLOBs, appear to deliver on the initial vision of the CLOB-DEX. However, these models introduce new challenges, including liquidity constraints, interoperability concerns, and security costs associated with establishing independent blockchain ecosystems.