Coexisting Exchange Platforms: Limit Order Books and Automated Market Makers

Jun Aoyagi and Yuki Ito

Journal of Political Economy Microeconomics, 2025, vol. 3, issue 3, 611 - 648

Abstract: Blockchain-based decentralized exchanges have adopted automated market makers (AMMs)—algorithms that aggregate liquidity and automatically set asset prices. This paper analyzes coexisting market structures—a limit order book (LOB) and an AMM—to investigate their interactions in terms of liquidity. Based on their fundamental design differences, we show that fluctuations in liquidity in the AMM stimulate disproportionate reactions from informed and noise traders, leading to a positive spillover effect on liquidity in the LOB market. Furthermore, unlike models that focus primarily on the AMM, the coexisting environment leads to a hump-shaped reaction of liquidity supply in the AMM to asset volatility.

Date: 2025
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