Initially, all cryptocurrency trading was centralized. The first decentralized exchange appeared in 2014 and was called NXT Asset Exchange. At the same time, similar projects appeared, in particular Counterparty DEX and Block DX, but they did not attract much attention.
Due to the ICO boom in 2017-2018, thousands of new crypto-assets appeared on the market. They were often traded on new DEXs such as EtherDelta, IDEX, DDex and others. Those ran mostly on the Ethereum blockchain and supported ERC-20 tokens. However, the standard problems of DEX at the time were low liquidity, large spreads, low speed, and too high transaction fees.
The real popularity of decentralized exchanges was brought by the technology of the Automated Market Maker (AMM). Instead of a traditional order book, it uses so-called pools of liquidity from asset pairs, and prices are calculated according to a mathematical formula based on their ratio in the pool. This makes it possible to create a decentralized architecture and guarantee onchain transactions via smart contracts, which are comparable to centralized venues in terms of execution speed.
AMM technology was first introduced by the Bancor project. However, the decentralized exchange Uniswap, launched in 2018 on the Ethereum blockchain, has become truly popular. Vitalik Buterin supported the project during its development.
Subsequently, the DEX-AMM model became the mainstream for decentralized exchanges and was copied for applications in other networks, including BNB Chain (PancakeSwap) and Fantom (SpookySwap). AMM-DEX also works in Solana, Cosmos, Terra and other ecosystems.
Liquidity providers to the pools receive commissions earned by the pool for exchanging assets of the respective pair. AMM-DEX has also gradually introduced other features, such as pharming, in which liquidity providers are automatically paid management tokens. These can then be sent to staking, used to participate in DAOs, or simply sold.
As of 2021, a new generation of DEXs is being developed. They, too, use AMM technology, but also allow the exchange of crypto-assets from different blockchains. For example, the Symbiosis Finance protocol implements this function using synthetic (“wrapped”) tokens. Another approach is offered by DEX from the THORChain project, which uses pools of native assets in different blockchains for exchange.