Decentralized Exchanges (DEX) Market Design

Student: Vidovich Vera

Faculty: International College of Economics and Finance

Educational Programme: International Programme in Economics and Finance (Bachelor)

Final Grade: 8

Year of Graduation: 2024

This study examines the Automated Market Making mechanism in Decentralized Ex- changes (DEXs), focusing on price discrepancies caused by fragmentation. The paper analyses Uniswap and Pancakeswap, the two popular DEXs, for a dataset collect from January 1st to May 31st, 2024. The key findings reveal that these discrepancies deviate in the short term but exhibit a mean-reverting behaviour over time. Pools with smaller fees see more frequent trades, whereas pools with larger fees have higher total volumes. We also find that higher gas prices discourage arbitrage, leading to larger mispricing differences. Furthermore, in pools with low liquidity, the convergence to the long-run equilibrium is faster. Our research contributes to the understanding of the efficiency of AMM-type markets and the impact of gas prices and liquidity on market price efficiency.

Full text (added June 9, 2024)

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