On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges

64 Pages Posted: 27 Dec 2021 Last revised: 6 Oct 2022

See all articles by Andrea Barbon

Andrea Barbon

University of St. Gallen; University of St.Gallen

Angelo Ranaldo

University of St. Gallen; Swiss Finance Institute

Date Written: October 3, 2022

Abstract

We compare the market quality of decentralized blockchain-based venues (DEXs) to centralized crypto exchanges (CEXs).

Our analysis of transaction costs and deviations from the no-arbitrage condition suggests that liquidity in CEXs and DEXs is similar but DEX prices are less efficient. While the main frictions for DEXs are high exchange fees and the gas cost of blockchain transactions, CEXs involve significant risks and latency associated with delegated custody.

We propose and empirically validate a stylized model of DEX liquidity provision, linking volume, fees, and liquidity in equilibrium. Our theory identifies the quantitative conditions for DEXs to overtake CEXs.

Keywords: Decentralized Exchanges, Automated Market Making, Blockchain, Decentralized Finance, Market Quality, Limit Order Book

JEL Classification: G14

Suggested Citation

Barbon, Andrea and Ranaldo, Angelo, On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges (October 3, 2022). University of St.Gallen, School of Finance Research Paper Forthcoming, Swiss Finance Institute Research Paper No. 22-38, Available at SSRN: https://ssrn.com/abstract=3984897 or http://dx.doi.org/10.2139/ssrn.3984897

Andrea Barbon (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

HOME PAGE: http://www.abarbon.com

University of St.Gallen ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.abarbon.com

Angelo Ranaldo

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

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