Decentralized Exchanges

Lehar, Alfred; Parlour, Christine A.

doi:10.2139/ssrn.3905316

Decentralized Exchanges

43 Pages Posted: 16 Aug 2021 Last revised: 21 Sep 2021

See all articles by Alfred Lehar

Alfred Lehar

University of Calgary - Haskayne School of Business

Christine A. Parlour

University of California, Berkeley - Finance Group

Date Written: August 14, 2021

Abstract

Uniswap is one of the largest decentralized exchanges with a liquidity balance of over 3 billion USD and daily trading volume of over 700 million USD. It is designed as a system of smart contracts on the Ethereum blockchain, and is a new model of liquidity provision, so called automated market making. We collect and analyze data on all 19 million Uniswap interactions from 2018 to the current time. For this new market, we characterize equilibrium liquidity pools and provide evidence that they are stable. We compare this automated market maker to Binance and establish absence of arbitrage and show conditions under which the AMM dominates a limit order market.

Keywords: Blockchain, Decentralized Finance, Automated Market Maker

Suggested Citation: Suggested Citation

Lehar, Alfred and Parlour, Christine A., Decentralized Exchanges (August 14, 2021). Available at SSRN: https://ssrn.com/abstract=3905316 or http://dx.doi.org/10.2139/ssrn.3905316