Publication Type

Working Paper

Version

publishedVersion

Publication Date

7-2024

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

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

First Page

1

Last Page

64

Identifier

10.2139/ssrn.4236993

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.2139/ssrn.4236993

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