Abstract

Blockchain-based decentralized exchanges have adopted automated market makers—algorithms that pool liquidity and make it available to traders by automatically determining prices. We develop a theoretical framework to analyze coexisting market-making structures: a traditional centralized limit-order market (CEX) and a decentralized automated market (DEX). A unique and stable general equilibrium exists with endogenous liquidity on both platforms. Due to the coexisting exchanges and endogenous platform choice by asymmetrically informed traders, DEX liquidity has a positive spillover effect on CEX liquidity. Moreover, liquidity supply on the DEX exhibits an ambiguous reaction to asset volatility, providing novel implications for DEX platform design.

About the Speaker

Dr. Jun Aoyagi

Assistant Professor, Department of Finance, Hong Kong University of Science and Technology