Price Discovery on Decentralized Exchanges

64 Pages Posted: 17 Oct 2022 Last revised: 1 Jul 2024

See all articles by Agostino Capponi

Agostino Capponi

Columbia University - Department of Industrial Engineering and Operations Research

Ruizhe Jia

Columbia University

Shihao Yu

Singapore Management University - Lee Kong Chian School of Business

Date Written: July 1, 2024

Abstract

Decentralized exchanges (DEXs) allow traders to express their willingness to pay for quick execution through a public priority fee bidding mechanism. This influences the trading strategy of informed traders and creates a distinct price discovery process on DEXs compared to centralized exchanges. We present empirical evidence that high-fee DEX trades contain more private information. Informed traders bid high fees not only to avoid execution risk from blockchain congestion, but also to compete for execution priority. Using a dataset of Ethereum mempool orders, we demonstrate that informed traders employ a ``jump bidding'' strategy, placing high initial bids to deter potential competitors.

Keywords: price discovery, blockchain fees, decentralized exchanges, informed traders, private information

JEL Classification: G10, G23, G14

Suggested Citation

Capponi, Agostino and JIA, RUIZHE and Yu, Shihao, Price Discovery on Decentralized Exchanges (July 1, 2024). Available at SSRN: https://ssrn.com/abstract=4236993 or http://dx.doi.org/10.2139/ssrn.4236993

Agostino Capponi (Contact Author)

Columbia University - Department of Industrial Engineering and Operations Research ( email )

RUIZHE JIA

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Shihao Yu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

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