Trust in DeFi: An Empirical Study of the Decentralized Exchange
61 Pages Posted: 2 Aug 2021 Last revised: 30 Nov 2023
Date Written: September 10, 2024
Abstract
We empirically study the role of the decentralized cryptocurrency exchange (DEX) in affecting cryptocurrency trading. We propose several hypotheses regarding the effect of DEX and find evidence consistent with a learning channel. That is, investors trust the DEX: DEX’s userbase information affects investor trading on the centralized cryptocurrency exchange (CEX). This effect intensifies during instances of market manipulation––“wash trading”—on the CEX or when investors have more concerns about it. Conversely, CEX’s userbase doesn’t reciprocally impact CEX trading. Using the “yield-farming” program launch as quasi-exogenous shocks, we confirm DEX’s causal impact on CEX trading. Our study highlights that the DEX can foster efficient, transparent trading structures where trustworthy centralized mechanisms are impractical or costly.
Keywords: blockchain, cryptocurrency, DeFi, smart contracts, wash trading, fake volume
JEL Classification: G12, G14
Suggested Citation: Suggested Citation