What This Guide Will Cover
This guide is for those looking to launch their own decentralized exchange (DEX). By the end of reading this guide, you will have a better understanding of the most common DEX models that exist today and the strategies for successfully positioning your offering. You will learn about various design and technical considerations to guide you if you plan to build the solution yourself, as well as options available if you prefer to buy or fork an existing solution.
Intro to Decentralized Exchanges
Decentralized Finance (DeFi) has demonstrated that financial markets, similar to those in traditional Web2 environments, can operate in a decentralized and trustless manner. The primary example of DeFi is a Decentralized Exchange, or DEX, which facilitates transparent financial transactions (trades) directly on the blockchain via smart contracts. DEXs contain multiple components, such as a backend (smart contracts) and frontend interface (for users to interact with the DEX smart contracts easily), and APIs, allowing developers to integrate DEX functionality into their own applications or dApps such as wallets and other Web3 protocols.
DEX Models
Decentralized Exchanges (DEXs) have become the cornerstone of financial activity on blockchains. The three most common DEXs in use today are:
Order Book DEXs
Automated Market Makers (AMMs)
Aggregated DEX Providers
Note that there are other types of financial instruments deployed on the blockchain such as derivatives (options, synthetics, etc.) but this won’t be in the scope of this guide.
To better understand these DEX models, let’s go a step further in detail.
Order Book DEXs
Order book DEXs utilize a traditional order book method to facilitate trades. In this model, a majority of the liquidity provided to the exchange is via market makers, who place limit orders on the order book. In the context of Web3, market makers are most commonly bots that run on specific strategies given market conditions. When one of their orders is filled by another user, they receive a percentage rebate of the order size being filled. Users can view the order book to see the current supply and demand and then place customizable orders (e.g., market, limit, bracket) that will be filled based on the order book at that current time.
