Trust in DeFi: An Empirical Study of the Decentralized Exchange

61 Pages Posted: 2 Aug 2021 Last revised: 30 Nov 2023

See all articles by Jianlei Han

Jianlei Han

Macquarie University - Faculty of Business and Economics

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Zhuo Zhong

University of Melbourne - Department of Finance

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

Han, Jianlei and Huang, Shiyang and Zhong, Zhuo, Trust in DeFi: An Empirical Study of the Decentralized Exchange (September 10, 2024). Available at SSRN: https://ssrn.com/abstract=3896461 or http://dx.doi.org/10.2139/ssrn.3896461

Jianlei Han

Macquarie University - Faculty of Business and Economics ( email )

Sydney, New South Wales 2109
Australia

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Zhuo Zhong (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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