Decentralized Exchanges: The 'Wild West' of Cryptocurrency Trading

30 Pages Posted: 21 Dec 2020 Last revised: 29 Jul 2021

See all articles by Angelo Aspris

Angelo Aspris

University of Sydney - Discipline of Finance

Sean Foley

Macquarie University

Jiri Svec

The University of Sydney - Discipline of Finance

Leqi Wang

The University of Sydney

Date Written: July 21, 2021

Abstract

Cryptocurrencies are traded on two types of exchanges – centralized and decentralized. Although trading in the largest cryptocurrencies primarily occurs on centralized exchanges, most newly issued tokens can only be exchanged using decentralized platforms. Volumes in these decentralized exchanges (including automated market makers) has recently increased exponentially. We examine the role of this new and unmonitored market, utilizing an extensive sample of tokens exclusively traded on decentralized platforms. We show significant differences in the listing and trading characteristics of these tokens relative to their centralized equivalents. A small selection of these tokens obtain listing on a centralized exchange during the sample period, which is accompanied by a significant increase in trading activity, consistent with market segmentation. A centralized listing results in a migration of volume away from decentralized platforms, revealing a strong preference by token holders for deeper and more liquid markets over the increased security and anonymity offered by decentralized exchanges.

Keywords: Decentralized Exchange, DEX, ICO, ERC-20 Tokens, DeFi, Cryptocurrency

JEL Classification: G23

Suggested Citation

Aspris, Angelo and Foley, Sean and Svec, Jiri and Wang, Leqi, Decentralized Exchanges: The 'Wild West' of Cryptocurrency Trading (July 21, 2021). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3717330 or http://dx.doi.org/10.2139/ssrn.3717330

Angelo Aspris

University of Sydney - Discipline of Finance ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Sean Foley (Contact Author)

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia
0417702600 (Phone)

Jiri Svec

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9036 6241 (Phone)

Leqi Wang

The University of Sydney ( email )

Sydney, NSW
Australia

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