The way cryptocurrency exchanges traditionally work is as follows:
A user deposits either fiat or cryptocurrency into their account and their balance on the exchange is credited. They then utilize the exchange’s order book and liquidity pool to buy the assets they desire and sell the ones they don’t. However, users have no control of their private key and hence, no control of their funds.
There are three classes of decentralized exchanges
Currently, decentralized exchanges are being developed along three avenues:
On-chain orderbooks and settlements
Off-chain order book with on-chain settlement
Smart contract-managed reserves.