Do Automated Market Makers in DeFi Ecosystem Exhibit Time-Varying Connectedness during Stressed Events?

Bikramaditya Ghosh (), Hayfa Kazouz and Zaghum Umar
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Bikramaditya Ghosh: Symbiosis Institute of Business Management, Symbiosis International (Deemed University), Bangalore 560100, India
Hayfa Kazouz: Faculty of Economic sciences and Management, University of Sousse, Sousse 4000, Tunisia

JRFM, 2023, vol. 16, issue 5, 1-12

Abstract: We investigate the connectedness of automated market makers (AMM) that play a pivotal role in liquidity and ease of operations in the decentralized exchange (DEX). By applying the TVP-VAR model, our findings show higher level of connectivity during periods of turmoil (such as Delta, Omicron variants of SARS-Covid, and the Russia Ukraine conflict). Furthermore, risk transmission/reception is found to be independent of the platform on which they typically run (Ethereum based AMMs were both emitters as well as receivers). Pancake (a Binance based AMM) and Perpetual Protocol (Ethereum based AMM) emerged as moderate to high receivers of risk transmission, whereas all of the other AMMs, including Ethereum, were found to be risk emitters at varying degrees. We argue that AMMs typically depend on the underlying smart contracts. If the contract is flexible, AMMs can vary (either receiver or emitter), otherwise AMMs behave in tandem.

Keywords: automated market makers (AMM); decentralized exchange (DEX); TVP-VAR; DeFi (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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