The trouble is, neither of those make money if run honestly. A true distributed exchange never has custody of anything. So there's no opportunity to steal or speculate with customer funds. (Front-running remains a possibility). It's just a back-end data service. It has to charge a commission. Most crypto exchanges are free to use; they make money either by stealing or manipulation.
Much the same is true for stablecoins. Tether just printed another billion dollars worth of Tether. Nobody deposited a billion dollars worth of USD. USDC is supposedly backed by U.S. Government securities, but is not formally audited.
Dexes have existed for years. Uniswap is the largest one with the highest volume. It exists as a set of onchain smart contracts, and thousands of independent liquidity providers set positions within price ranges while an onchain routing system directs swaps between tokens according to deterministic rules. The fee for swaps is configurable by the LPs, and can be anywhere from .01 to 1%, but 0.3% is probably the most common fee charged.
It would not have survived multiple bear market cycles with tens of billions in redemptions and drawdowns if it wasn't solvent. The last cycle took out plenty of players who truly were insolvent (Luna, FTX, BlockFi, fo name a few).
A truly distributed exchange is a protocol and a protocol doesn't really need to make money though. Atleast not in the same way as an exchange needs to. It's only cost is R&D. The users of the protocol pays the fee for both execution and storage, so there is no cost on the exchange side. Ofcourse there is the cost of running a frontend or providing your powerusers easy access to trading data, but that could be a paid service.
A distributed exchange is a matching service. The trade execution is distributed. But somebody has to maintain the order book and means for distributing and displaying it. When there's a match, something tells two smart contracts to talk to each other and go. The blockchain itself is not a matching engine.
Decentralized exchanges do not typically run on an order book model. Instead liquidity providers allocate capital in specific price ranges that follow a determininistic price curve ratio and a simple formula is used to rebalance as traders swap between token pairs.
There are two things. First, a distributed exchange can be built around an AMM, so match making is essentially lazy because you are selling into and buying from an automated liquidity pool, instead of depending on market makers and matching orders. Second, there are order book based protocols that implement order matching as a decentralized consensus mechanism. So the blockchain itself can be a matching engine, provided that's what it's execution environment is built to do.
Underlying all the buzzwords, blockchains are about distributed communications with economic incentives attached to them and a more complex leader election mechanism. So there can be many things that can have the term blockchain slapped on them with a bit of tweaking.
It doesn't really take anyone to run them, though. At their core, they're just a bunch of smart contracts. The web UI is a) optional and b) can be hosted by anyone, even locally. The bigger problem is that providing liquidity isn't really a good deal in general.
How problematic is a 0.3% fee? If the two options were otherwise equal, I think most users would rather pay that than deal with potentially losing their funds altogether due to fraud or insolvency.
It's not problematic unless the pairs are highly correlated or one is doing high frequency trading. Ever since Uni v3 in 2021 though, LPs can set lower fees on pairs, as low as 0.01%.
Uniswap has done almost $2 trillion in volume over the past 4 years.
Sure, but even then, not all traders. Preference will depend on risk tolerance and other factors. The point is: just because there is a 0.3% fee (or lower, as sibling comment noted), does not mean this option will never be viable or preferable to many users.
USD is backed by the value and legitimacy of the world's largest economy and world's largest military. I don't think Tether has that kind of track record...
The trouble is, neither of those make money if run honestly. A true distributed exchange never has custody of anything. So there's no opportunity to steal or speculate with customer funds. (Front-running remains a possibility). It's just a back-end data service. It has to charge a commission. Most crypto exchanges are free to use; they make money either by stealing or manipulation.
Much the same is true for stablecoins. Tether just printed another billion dollars worth of Tether. Nobody deposited a billion dollars worth of USD. USDC is supposedly backed by U.S. Government securities, but is not formally audited.