The Need for Fees at a DEX: How Increases in Fees Can Increase DEX Trading Volume

26 Pages Posted: 26 Aug 2022

See all articles by Joel Hasbrouck

Joel Hasbrouck

New York University (NYU) - Department of Finance

Thomas J Rivera

McGill University

Fahad Saleh

Wake Forest University - Schools of Business

Date Written: August 17, 2022

Abstract

We demonstrate that increasing trading fees at a decentralized exchange (DEX) can increase DEX trading volume. This result arises due to the fact that higher DEX fees can endogenously reduce the price impact of trading at the DEX, thereby reducing the overall DEX trading cost and driving trading activity to the DEX from competing exchanges. The referenced relationship between fees and price impacts arises because DEXs employ a mechanical pricing rule whereby price impacts reduce with the DEX inventory level, and DEXs acquire inventory by offering DEX fee revenue in exchange for capital from investors used to finance the DEX inventory. When fees are sufficiently low, increases in the DEX fee level lead to higher DEX fee revenue and higher DEX investment returns, thereby increasing DEX inventory; in turn, price impacts decline and so too do overall trading costs, resulting in an increase in DEX trading volume.

Keywords: Decentralized Exchange, DEX, Automated Market Makers, AMM

JEL Classification: G10, G12

Suggested Citation

Hasbrouck, Joel and Rivera, Thomas and Saleh, Fahad, The Need for Fees at a DEX: How Increases in Fees Can Increase DEX Trading Volume (August 17, 2022). Available at SSRN: https://ssrn.com/abstract=4192925 or http://dx.doi.org/10.2139/ssrn.4192925

Joel Hasbrouck

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
MEC Suite 9-190, Mail Code 0268
New York, NY 10012-1126
United States
212-998-0310 (Phone)
212-995-4233 (Fax)

Thomas Rivera

McGill University ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5

Fahad Saleh (Contact Author)

Wake Forest University - Schools of Business

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

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