♺ [Analysis] Why decentralized exchange protocols matter – Fred Ehrsam
A decentralized exchange (DEX) has some combination of decentralized properties. At the moment this most likely means some mix of 1) on-blockchain trade clearing, 2) ability for users to retain control of their funds, and 3) hosting an orderbook in some decentralized manner. They may run on a decentralized exchange protocol or directly on smart contract protocols. A decentralized exchange protocol defines some combination of: a common trade order format, a way to reward those who spread orders, and a way to complete a trade when a match is found.   Benefits of DEXs:
- Users directly control their own funds
- Global orderbooks
- Low friction
Benefits of DEX protocols:
- Orders share the same format and can be matched by anyone in any venue, from a p2p relay network to a decentralized exchange app to a text message
- Significantly lower the friction of running a decentralized application by facilitating token exchanges
- DEX protocols are open standards that are easy for anyone to build on and customize
- Can automatically support new tokens immediately
Challenges for DEXs:
- Low throughput
- Scalability
- No fiat support
- Unknown regulatory status
- Poor UI
- Lack of liquidity
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