The Rise of Decentralized Cryptocurrency Exchanges: Evaluating the Role of Airdrops and Governance Tokens
37 Pages Posted: 3 Oct 2021 Last revised: 6 Dec 2022
Date Written: August 31, 2021
Abstract
The market capitalization of cryptocurrencies sat at over $2 trillion in 2021. While most of the financial activity remains on centralized systems, decentralized finance (DeFi) has experienced a particular surge with roughly 90,000 users at the start of 2020 to 4.28 million by the end of 2021. Based on data collected from a popular crypto-asset data aggregation service and manually collected data, we document the rapid growth in decentralized exchanges and their differences in volume and price dynamics from centralized exchanges. Next, we investigate the role of airdrops and governance tokens as mechanisms for expanding the base of users and driving up the value of an exchange. While our results do not have a causal interpretation, they provide preliminary evidence that both mechanisms are effective for expanding and strengthening networks, particularly for decentralized exchanges. We also exploit two event studies that suggest the growth in decentralized exchanges is not driven by speculation, but at least partially by value-creating cybersecurity benefits.
Keywords: Airdrops, Blockchain, Decentralized Exchanges, Decentralized Finance, Expectations, Smart Contracts
JEL Classification: D82, D84, G29, L86
Suggested Citation: Suggested Citation