Definition ∞ A decentralized exchange protocol enables peer-to-peer cryptocurrency trading directly on a blockchain without intermediaries. These protocols operate through smart contracts, allowing users to exchange digital assets from their own wallets, thereby retaining custody of their funds. They eliminate the need for a central authority to hold assets or process transactions, enhancing security and reducing censorship risks. Trading occurs via automated market makers or order books managed by the protocol’s code.
Context ∞ Decentralized exchange protocols represent a foundational element of the decentralized finance landscape, providing a non-custodial trading environment. Regulatory bodies are increasingly examining these protocols, particularly concerning their compliance with anti-money laundering and know-your-customer requirements. A key discussion point involves the balance between decentralization and user protection, especially regarding potential vulnerabilities in smart contract code. Future advancements focus on improving liquidity, reducing transaction costs, and enhancing user experience to compete with centralized exchanges.
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