Some say a "decentralized exchange" is an oxymoron. Perhaps not, but for now it's not much more than an aspiration.

Over the past year, dozens of cryptocurrency trading platforms have marketed themselves as decentralized exchanges. While models vary, the term implies they allow users to trade on a peer-to-peer basis, and more importantly, without using a platform operated by a single entity.

The main selling point is that unlike today's better-known crypto trading platforms (think Coinbase, Kraken or Binance), a decentralized exchange shouldn't require traders to store their money with a third party that can be hacked. Yet while "DEX" has been a hot buzzword, it's been unclear how decentralized they actually are.

Early indications, however, suggest they're not living up to their name yet.

According to data collected exclusively for CoinDesk from July 2 to July 12 by the ethereum analytics firm Alethio, as well as interviews with market participants, what decentralized exchange models actually offer is a spectrum of technologies with varying degrees of centralization.

Some attempt to decentralize a traditional exchange company, such as the Huobi Chain Project announced in June, while others seek to build a community with stakeholders around a peer-to-peer model, like 0x.

"Decentralized exchanges are making headway toward the re-elimination of central parties in that [crypto trading] system," said Wall Street veteran Jill Carlson.

But they still have quite a ways to go.

For example, Bancor (through its smart contracts) was itself the only market maker on its decentralized platform, where it facilitated roughly 9,691 token swaps between 1,147 traders over the two-week period, Alethio found.

According to Bancor, however, it neither funds nor controls the smart contracts for many tokens on its platform. "Most conversions on Bancor are processed by smart contracts that are owned and managed by the tokens that list on the Bancor Network, " Nate Hindman, Bancor's head of communications, told CoinDesk.

Yet the lack of diversity implied by Alethio's data highlights a problem with the "decentralized liquidity network," demonstrated by the steps Bancor took to address a recent $13.5 million hack. Specifically, Bancor's freezing of funds, an action allowed by a mechanism in its code, prompted criticism that the platform was, for all intents and purposes, no different than its centralized predecessors.

"You're not a 'decentralized exchange' if you're taking away other people's tokens whenever you want," tweeted developer Udi Wertheimer.

One problem with talking about decentralization in this context is that it can be measured in different ways. An exchange platform might be highly centralized in one dimension but quite decentralized in others.

Take, for example, 0x. During the two weeks tracked by Alethio this open-source protocol that relies on independent relayers for token trading, had 914 market makers facilitating 9,017 trades by 234 traders – already head and shoulders above Bancor in the diversity-of-participants department.

However, those trades are funneled through a much smaller number (17) of "relayer startups." Each relayer has its own business model, and the majority of them use their own proprietary software built on top of 0X, rather than purely open-source code that anyone can inspect.

And while 0x isn't responsible for compliance with regulations, its relayers are. So it's hard to call this type of DEX leaderless.

One of those relayers, Paradex, was acquired in May by Coinbase, a company that many in crypto would call the quintessential centralized exchange.

To be fair, though, it could be argued that the 0X ecosystem is arguably more decentralized than other exchanges in the way that counts the most.

"It's different from a centralized exchange because these relayers are not holding user funds at all. They are completely non-custodial," Amir Bandeali, CTO of 0x, told CoinDesk. "We have seen a lot of relayers starting to make open source market-making tools."

For Carlson, who works as a consultant to 0x, the term "decentralized" should primarily apply to non-custodial trading platforms. As such, she believes hacks such as the Bancor theft point to the dangers of centralized custodians, telling CoinDesk:

Stepping back, it's important to remember that the DEX market is in its infancy, and so the volume is still pretty low.

Indeed, among the DEX platforms analyzed by Alethio, the most popular was IDEX, an exchange developed by the fintech firm Aurora, which facilitated 69,339 swaps between 12,400 traders during the two-week period.

Compared to centralized Bitfinex, which facilitated roughly 92,024 trades in just two days, from July 9 and 10, according to CoinDesk's analysis of its trade history, IDEX's volume is a tiny drop in the niche bucket.

Marshall Swatt, founder of the institutional crypto asset exchange Swatt Exchange, argued that decentralized exchanges are merely "a fancy form" of over-the-counter (OTC) trading that won't be able to scale. He told CoinDesk:

Swatt, who previously co-founded the New York bitcoin exchange Coinsetter then sold it to Kraken in 2016, warned against underestimating the difficulty of managing compliance, security, and customer support, business departments that may not fit bitcoin's grassroots model.

"You'll never have the level of liquidity because it will never attract the algorithmic traders," he said.

Indeed, most DEX models only allow users to swap one cryptocurrency for another, which keeps newcomers to crypto, whether they be institutional investors or first-time buyers, at bay.

Carlson agreed it's hard to imagine decentralized order books, market makers, or know-your-customer identity checks. These are all core pillars of most popular exchanges.

However, in her view, it's an oversimplification to say DEX is merely glorified OTC.

"The difference here, at least today, lies at the settlement level, not at the execution level," Carlson said, speaking to how some DEXs allow P2P settlement without third party oversight or custody. "What you end up with is an experience that is disintermediated."

Indeed, none of the shortcomings of current decentralized exchanges have quelled the DEX fervor sweeping the industry.

Speaking to the Paradex acquisition, Scalar Capital co-founder Linda Xie, a Coinbase alum turned hedge fund manager and 0X advisor, told CoinDesk demand for non-custodial P2P platforms could inspire centralized incumbents to offer DEX options as well.

Indeed, Bloomberg reported the long-established exchange Binance wants to "decentralize" itself. So does the legacy platform provider Huobi, which announced in June it's offering roughly $166 million to a fund for contributors to the upcoming Huobi Chain Project, which aims to establish a decentralized autonomous organization (DAO) and eventually incorporate parts of Huobi's exchange.

"We're not 100 percent sure if a corporation can be 100 percent autonomous," Gordon Chen, Huobi Chain Project's executive leader, told Coindesk. "We're not sure if it can be 100 percent decentralized either. But we believe there can be some kind of balance in between."

Although granting businesses more sway than users on Huobi's voter-driven exchange HADAX sparked backlash, a few hundred people already applied to build the project's public blockchain.

Along those same lines, Bancor co-founder Eyal Hertzog tweeted that his project is also on a "pathway to decentralization."

Alethio's data suggests that so far platforms with more straightforward P2P models have achieved more diversity of participants, even if they have so far gained less traction. For example, during this two-week period in July the startup AirSwap, which operates almost like a Craigslist for ethereum tokens, facilitated 695 swaps between 216 traders with the help of 60 unique market makers.

Such potential is why Xie remains optimistic about the prospect of DEXs, saying: "This is still just the start."

Agreeing with Xie's point, Carlson said the wide range of models offer a promising starting point for the further decentralization of trading platforms, concluding:

Man in maze image via Shutterstock

Update: This article has been updated to reflect Bancor's response to the data and to better reflect its role in market making.