Could Smart Contracts on a Blockchain Replicate the Function of a CLOB for Bespoke Derivatives?

In theory, smart contracts could replicate a CLOB for bespoke derivatives, but with significant challenges. A smart contract could encode the unique terms of a derivative and act as an automated matching engine.

However, the core problem of liquidity remains; if each contract is unique, there will be no one else to trade with, and the order book would be empty. For this to work, there would need to be a secondary market protocol that could algorithmically find and price compatible (but not identical) contracts, which is a highly complex and still-developing area of decentralized finance (DeFi).