An order book is a real-time ledger of buy and sell orders for an asset on an exchange, displaying the quantities traders want to buy or sell at various price levels. Bids represent buy orders (what buyers will pay); asks represent sell orders (what sellers want). The spread, the gap between highest bid and lowest ask, indicates market efficiency and liquidity. Tight spreads mean competitive markets with many participants; wide spreads indicate thin liquidity or uncertainty. Order book depth reveals how much volume exists at each price level. Deep books can absorb large trades without significant price impact; shallow books move sharply on moderate volume. Traders analyze order book dynamics for insight: large bid walls might indicate support levels; ask walls might signal resistance. However, these can be spoofed, large orders placed and cancelled to manipulate perception. Market orders execute immediately against the best available price in the book; limit orders join the book at specified prices, waiting for a match. Order books dominated traditional finance and centralized crypto exchanges. Decentralized exchanges (DEXs) initially couldn't support order books due to blockchain limitations, leading to AMM innovation. Recent DEXs like dYdX run order books on specialized chains fast enough for traditional matching.
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