For these, blockchain is only used as a settlement layer while the orders are hosted by centralized third-parties.

Off-chain order book exchanges

In this case, every order is stored within a smart contract, so there is no need for additional infrastructure or third-party hosts. Network fees can be high in this approach because every action requires a blockchain transaction.

On-chain order book exchanges

These exchanges use smart contracts for transaction settlement. We can distinguish two types of order book exchanges based on how order books are hosted.

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* Decentralized order book exchanges
* Constant function market maker
* Smart contract-based reserve aggregation
* Peer-to-peer protocols

Types of decentralized exchange protocols

Schär, Fabian, Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets (March 8, 2020). Available at SSRN: https://ssrn.com/abstract=3571335 or http://dx.doi.org/10.2139/ssrn.3571335 



Decentralized Finance: On Blockchain and Smart Contract-based Financial Markets

Decentralized order book exchanges

These are smart-contract based liquidity pools that contain at least two cryptoassets in reserve. The exchange rate is set through a constant product model. Users engage directly with the pool to exchange assets.

Constant function market maker

A type of protocol that uses a smart contract to consolidate liquidity reserves and lets liquidity providers advertise prices for specific trades. The smart contract will compare prices and it accepts the best offer for a user, executing the trade.

Smart contract-based reserve aggregation

First, participants query a network to find a counterparty to trade with. Then, the two parties bilaterally negotiate a price. A smart-contract executes the trade on-chain once  a price is agreed upon. 

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