How does the counterparty decentralized exchange work?

Well, it is how it works, it’s just that the DEx will match the best, and not specific (by seller address, or maybe amount), offer.

The reason why “BTC Sell” was removed from Counterwallet was that more people used it than tried to understand it.

As a consequence, they’d place their BTC sell order (another way to look at it: XCP buy order, in exchange for BTC) and log out. Because they’d have to be online to pay, even if their order matched, their transaction would not happen, they’d pay transaction fees and get nothing in return. Because the ignorant constantly outnumbered those who read the docs or forums, complaints about this were too numerous to deal with.

So now those who want to sell BTC on the DEx have to use the CLI, while the person buying BTC (or: selling XCP or other Counterparty token) can use CW.