Decentralised dealers? examining liquidity provision in decentralised exchanges

Matteo Aquilina, Sean Foley, Leonardo Gambacorta and William Krekel

No 1227, BIS Working Papers from Bank for International Settlements

Abstract: Decentralised exchanges allow participants to buy and sell assets without the need for intermediaries, in theory democratising liquidity provision. However, using data from the largest decentralised exchange, we show that liquidity provision – rather than being the purview of a diffused set of market participants – is instead confined predominantly to a small group o f sophisticated ones. These participants submit orders that mimic bids and asks and are able to extract significantly higher profits (both in absolute and relative terms) compared to their unsophisticated counterparts. They also exhibit considerable skill, extracting higher profits during periods of high volatility by capturing a higher share of trading without incurring additional adverse selection.

Keywords: market design; market making; liquidity; automated market maker; decentralised finance (search for similar items in EconPapers)
JEL-codes: D47 G14 G23 (search for similar items in EconPapers)
Date: 2024-11
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