On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges

We assess the market quality of centralized crypto exchanges (CEXs) and decentralized blockchain-based venues (DEXs). Utilizing unique and highly representative data, we analyze two key aspects of market quality: transaction costs and deviations from the no-arbitrage condition.

We find that DEXs eliminate custody risk and offer competitive trading costs, especially when the large size of transactions dilutes the burden of gas fees. Furthermore, we provide causal evidence of the adverse impact of gas fees on price efficiency.

Future blockchain improvements aimed at reducing gas prices could facilitate broader adoption of DEXs, even for traditional assets.

Keywords: Decentralized Exchanges, Automated Market Making, Blockchain, Decentralized Finance, Market Quality, Limit Order Book, Uniswap

JEL Classification: G14

Suggested Citation: Suggested Citation

Barbon, Andrea and Ranaldo, Angelo, On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges (March 29, 2024). University of St.Gallen, School of Finance Research Paper Forthcoming, Swiss Finance Institute Research Paper No. 22-38, Available at SSRN: https://ssrn.com/abstract=3984897 or http://dx.doi.org/10.2139/ssrn.3984897