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
Citation
CAPPONI, Agostino; JIA, Ruizhe; and YU, Shihao.
Price discovery on decentralized exchanges. (2024). 1-64.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7508
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.4236993