On The Quality Of Cryptocurrency Markets

Despite the growing adoption of decentralized exchanges, little is known about their market quality. Using a novel and comprehensive dataset, we compare decentralized blockchain-based venues (DEXs) to centralized crypto exchanges (CEXs) by assessing two key aspects of market quality: price efficiency and market liquidity. We find that CEXs provide better market quality overall and identify the main friction dampening DEX efficiency as the high gas price stemming from proof-of-work blockchains. We propose and empirically validate a stylized model of DEX liquidity provision, linking trading volume, protocol fees, and liquidity in equilibrium. Our theory identifies the quantitative conditions needed for DEXs to overtake CEXs in the future.