Traditional/Centralized exchanges and DEX (decentralized exchanges) have each their advantages and back draws, exchange protocols implemented as micro services are being developed that will end the exchange problems
This basic form of exchanges is where it all started when BitcoinMarket.com the first Bitcoin exchange started operating on March 17 2010 and by February 2011 Bitcoin had surpassed the US dollar in value. Nowadays there are a large number of exchanges operating with the top exchanges being, Bitfinex, Bitstamp, Bittrex, Binance and Gemini.
These traditional exchanges have served us well and contributed to the adaptation of Bitcoin and other cryptocurrencies. Meanwhile the requirements on digital currency exchanges keeps rising with higher demand and certain inadequacies of this exchange model have been documented.
Due to these inadequacies a new model was developed e.g. DEX (decentralized exchange). This model is meant to minimize the role of the business operating the exchange, increase transparency and security.
This evolved form of exchanges started recently with IDEX opening its trading platform for real-time trading in September 2017 and Waves Dex debuting its platform in April 2018. At the time of writing quite a few decentralized exchanges have emerged namely OpenLedger Dex, CryptoBridge Dex, OasisDex, Radar Relay, BarterDex, Bisq (e.g. BitSquare) and Stellar Dex.
This new type of exchanges are slowly taking marketshare from the traditional exchanges and transforming the cryptocurrency exchange market. While being the new preferred exchange model by mitigating previous security concerns, these exchanges are going to face some hurdles like for example liquidity, fragmented liquidity unless they start to develop towards interoperability between decentralized exchanges.
Additionally, they need to address other concerns like scalability, delay in execution and possible costly modification to orders which is inherited from the limitations of the underlying blockchains.
Finally, since orders on decentralized exchanges are blockchain orders, the order books are public, a transaction to place an order is visible to miners and this information can be used by bots to front run and make the price or order execution move against the entity placing an order.
Due to these inadequacies purely blockchain-based exchanges (e.g. current decentralized exchange), again a new exchange methodology is being developed aka Exchange Protocols. The Exchange Protocols are meant to address these concerns by enabling interoperability between decentralized exchanges on multiple blockchains.
This third generation and or type of exchanges are being enabled by development of exchange protocols by for example Loopring and 0x project. These exchange protocols will enable interoperability by allowing inter-token exchanges on blockchains using smart contracts. Looprings exchange protocol can support inter-token transactions on any blockchain (at the time of writing Loopring supports inter-token transactions on Ethereum, Qtum and NEO blockchain) that supports smart contracts while 0x Protocol is aimed at being used on the Ethereum blockchain.
These protocols aim to lay the foundation for fair order execution, liquidity sharing and efficient fee savings by enabling off-chain order laying, on-chain order settlement, order-grouping, order-relay and order-ring technology will broadcast and find matching orders across all tokens on the blockchain and execute buy and sell orders directly between tokens without the need of extra fees based on traditional exchange pairs.
An important feature that is built in to the design of the network that will implement these exchange protocols is by splitting the work on different nodes that have their specific responsibilities in a network and will be able to receive financial incentives for executed work depending on their role.
We can assume that in the starting phase of getting these exchange protocols up and running (e.g. being used) the pioneer nodes will be sponsored and as the network grows additional businesses will setup their nodes to strengthen the network and it will grow organically from there on much like the existing lightning network.
On the security side additional measures are being built into the protocols to prevent front-running orders, sybil or DOS attacks and spamming of orders from accounts with insufficient balances.
It is apparent that the projects behind the coming exchange protocols are well-versed in the ideas of scalability, interoperability, transparency, security and decentralization which proofs to be what is required to truly enhance cryptocurrency exchange and their vision is promising for enabling the growth of crypto by supporting future mass-adaptation of cryptocurrencies.
If all goes well next time Bitcoin hits the all-time high, we are not limited by the operation of a few centralized exchanges and they will not need to close new account registrations or have delays in responding to support tickets in large quantities.