On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges

Andrea Barbon and Angelo Ranaldo
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Andrea Barbon: University of St. Gallen

No 22-38, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Despite the growing adoption of decentralized exchanges, little is known about their market quality. Using a comprehensive dataset, we compare decentralized blockchain-based venues (DEXs) to centralized crypto exchanges (CEXs) assessing two aspects of market quality: price efficiency and market liquidity. We find that CEXs provide better market quality and identify the main friction dampening DEX efficiency as the high gas price stemming from proof-of-work blockchains. We propose and empirically validate a stylized model of DEX liquidity provision, linking trading volume, protocol fees, and liquidity. We identify quantitative conditions needed for DEXs to overtake CEXs in the future.

Keywords: Decentralized Exchanges; Automated Market Making; Blockchain; Decentralized Finance; Market Quality; Limit Order Book (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-mst and nep-pay
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Related works:
Working Paper: On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2238

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