IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v79y2023ics092911992300007x.html
   My bibliography  Save this article

The rise of decentralized cryptocurrency exchanges: Evaluating the role of airdrops and governance tokens

Author

Listed:
  • Makridis, Christos A.
  • Fröwis, Michael
  • Sridhar, Kiran
  • Böhme, Rainer

Abstract

While most cryptocurrency financial activity is conducted on centralized exchanges, decentralized finance (DeFi) has experienced a particular surge with roughly 90,000 users at the start of 2020 to 4.28 million by the end of 2021. Based on data collected from a popular crypto-asset data aggregation service and manually collected data, we document the rapid growth in decentralized exchanges and their differences in volume and price dynamics from centralized exchanges. Next, we investigate the role of airdrops and governance tokens as mechanisms for expanding the base of users and driving up the value of an exchange. While our results do not have a causal interpretation, they provide preliminary evidence that both mechanisms are effective for expanding and strengthening networks, particularly for decentralized exchanges. We also exploit two event studies that suggest the growth in decentralized exchanges is not driven by speculation, but at least partially by value-creating cybersecurity benefits.

Suggested Citation

  • Makridis, Christos A. & Fröwis, Michael & Sridhar, Kiran & Böhme, Rainer, 2023. "The rise of decentralized cryptocurrency exchanges: Evaluating the role of airdrops and governance tokens," Journal of Corporate Finance, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:corfin:v:79:y:2023:i:c:s092911992300007x
    DOI: 10.1016/j.jcorpfin.2023.102358
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S092911992300007X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2023.102358?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Guillermo Angeris & Tarun Chitra, 2020. "Improved Price Oracles: Constant Function Market Makers," Papers 2003.10001, arXiv.org, revised Jun 2020.
    2. Emily Oster, 2019. "Unobservable Selection and Coefficient Stability: Theory and Evidence," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(2), pages 187-204, April.
    3. Sabrina T Howell & Marina Niessner & David Yermack & Jiang Wei, 2020. "Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales," Review of Financial Studies, Society for Financial Studies, vol. 33(9), pages 3925-3974.
    4. Bleher, Johannes & Dimpfl, Thomas, 2019. "Today I got a million, tomorrow, I don't know: On the predictability of cryptocurrencies by means of Google search volume," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 147-159.
    5. Cong, Lin William & Li, Ye & Wang, Neng, 2022. "Token-based platform finance," Journal of Financial Economics, Elsevier, vol. 144(3), pages 972-991.
    6. Zhuan Pei & Jörn-Steffen Pischke & Hannes Schwandt, 2019. "Poorly Measured Confounders are More Useful on the Left than on the Right," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(2), pages 205-216, April.
    7. Lin William Cong & Zhiguo He, 2019. "Blockchain Disruption and Smart Contracts," Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1754-1797.
    8. David Yermack, 2017. "Corporate Governance and Blockchains," Review of Finance, European Finance Association, vol. 21(1), pages 7-31.
    9. Sean Foley & Jonathan R Karlsen & Tālis J Putniņš, 2019. "Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies?," Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1798-1853.
    10. Henri Arslanian, 2022. "The Book of Crypto," Springer Books, Springer, number 978-3-030-97951-5, November.
    11. Henri Arslanian, 2022. "Crypto-Asset Creation and Distribution," Springer Books, in: The Book of Crypto, chapter 0, pages 277-289, Springer.
    12. Pieters, Gina & Vivanco, Sofia, 2017. "Financial regulations and price inconsistencies across Bitcoin markets," Information Economics and Policy, Elsevier, vol. 39(C), pages 1-14.
    13. Igor Makarov & Antoinette Schoar, 2021. "Blockchain Analysis of the Bitcoin Market," NBER Working Papers 29396, National Bureau of Economic Research, Inc.
    14. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    15. Rainer Böhme & Nicolas Christin & Benjamin Edelman & Tyler Moore, 2015. "Bitcoin: Economics, Technology, and Governance," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 213-238, Spring.
    16. Yukun Liu & Aleh Tsyvinski, 2021. "Risks and Returns of Cryptocurrency," Review of Financial Studies, Society for Financial Studies, vol. 34(6), pages 2689-2727.
    17. Lewis Gudgeon & Sam M. Werner & Daniel Perez & William J. Knottenbelt, 2020. "DeFi Protocols for Loanable Funds: Interest Rates, Liquidity and Market Efficiency," Papers 2006.13922, arXiv.org, revised Oct 2020.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Saggese, Pietro & Belmonte, Alessandro & Dimitri, Nicola & Facchini, Angelo & Böhme, Rainer, 2023. "Arbitrageurs in the Bitcoin ecosystem: Evidence from user-level trading patterns in the Mt. Gox exchange platform," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 251-270.
    2. Yutong Quan & Xintong Wu & Wanlin Deng & Luyao Zhang, 2023. "Decoding Social Sentiment in DAO: A Comparative Analysis of Blockchain Governance Communities," Papers 2311.14676, arXiv.org.
    3. Quan, Yutong & Wu, Xintong & Deng, Wanlin & Zhang, Luyao, 2023. "Decoding Social Sentiment in DAO: A Comparative Analysis of Blockchain Governance Communities," OSF Preprints bq6tu, Center for Open Science.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Sockin & Wei Xiong, 2023. "Decentralization through Tokenization," Journal of Finance, American Finance Association, vol. 78(1), pages 247-299, February.
    2. Romi Kher & Siri Terjesen & Chen Liu, 2021. "Blockchain, Bitcoin, and ICOs: a review and research agenda," Small Business Economics, Springer, vol. 56(4), pages 1699-1720, April.
    3. Gilles Hilary & Laura Xiaolei Liu, 2021. "Blockchain and Other Distributed Ledger Technologies in Finance," Springer Books, in: Raghavendra Rau & Robert Wardrop & Luigi Zingales (ed.), The Palgrave Handbook of Technological Finance, pages 243-268, Springer.
    4. Lin William Cong & Yizhou Xiao, 2021. "Categories and Functions of Crypto-Tokens," Springer Books, in: Maurizio Pompella & Roman Matousek (ed.), The Palgrave Handbook of FinTech and Blockchain, edition 1, chapter 0, pages 267-284, Springer.
    5. Ilya Ivaninskiy & Irina Ivashkovskaya & Joseph A. McCahery, 2023. "Does digitalization mitigate or intensify the principal-agent conflict in a firm?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 27(3), pages 695-725, September.
    6. Julia Reynolds & Leopold Sögner & Martin Wagner, 2021. "Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 13(2), pages 105-146, June.
    7. Cahill, Daniel & G. Baur, Dirk & (Frank) Liu, Zhangxin & W. Yang, Joey, 2020. "I am a blockchain too: How does the market respond to companies’ interest in blockchain?," Journal of Banking & Finance, Elsevier, vol. 113(C).
    8. Jongsub Lee & Tao Li & Donghwa Shin, 2022. "The Wisdom of Crowds in FinTech: Evidence from Initial Coin Offerings," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(1), pages 1-46.
    9. Laurens Swinkels, 2023. "Empirical evidence on the ownership and liquidity of real estate tokens," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-29, December.
    10. Flori, Andrea, 2019. "News and subjective beliefs: A Bayesian approach to Bitcoin investments," Research in International Business and Finance, Elsevier, vol. 50(C), pages 336-356.
    11. Stefano Martinazzi & Daniele Regoli & Andrea Flori, 2020. "A Tale of Two Layers: The Mutual Relationship between Bitcoin and Lightning Network," Risks, MDPI, vol. 8(4), pages 1-18, December.
    12. Şoiman, Florentina & Dumas, Jean-Guillaume & Jimenez-Garces, Sonia, 2023. "What drives DeFi market returns?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    13. Martin Cimiterra & Jackie Krafft & Lionel Nesta, 2021. "Blockchain as Schumpeter Mark 1 or Mark 2? An empirical analysis of blockchain job offers in France and Germany [Innovation: mapping the winds of creative destruction]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(6), pages 1388-1402.
    14. Andrew Detzel & Hong Liu & Jack Strauss & Guofu Zhou & Yingzi Zhu, 2021. "Learning and predictability via technical analysis: Evidence from bitcoin and stocks with hard‐to‐value fundamentals," Financial Management, Financial Management Association International, vol. 50(1), pages 107-137, March.
    15. Wang, Jiaxin & Huang, Xiang & Gu, Qiankun & Song, Zilong & Sun, Ruiyi, 2023. "How does fintech affect bank risk? A perspective based on financialized transfer of government implicit debt risk," Economic Modelling, Elsevier, vol. 128(C).
    16. Dulani Jayasuriya Daluwathumullagamage & Alexandra Sims, 2020. "Blockchain-Enabled Corporate Governance and Regulation," IJFS, MDPI, vol. 8(2), pages 1-41, June.
    17. Prateek Saxena, 2020. "Comments on “Cellular Structure for a Digital Fiat Currency” — Cellular DFC Design: Technological Perspectives," World Scientific Book Chapters, in: Bernard Yeung (ed.), DIGITAL CURRENCY ECONOMICS AND POLICY, chapter 11, pages 103-109, World Scientific Publishing Co. Pte. Ltd..
    18. Abakah, Emmanuel Joel Aikins & Wali Ullah, GM & Adekoya, Oluwasegun B. & Osei Bonsu, Christiana & Abdullah, Mohammad, 2023. "Blockchain market and eco-friendly financial assets: Dynamic price correlation, connectedness and spillovers with portfolio implications," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 218-243.
    19. Süssmuth, Bernd, 2019. "Bitcoin and Web Search Query Dynamics: Is the price driving the hype or is the hype driving the price?," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203566, Verein für Socialpolitik / German Economic Association.
    20. Cole, Benjamin M. & Dyhrberg, Anne H. & Foley, Sean & Svec, Jiri, 2022. "Can Bitcoin be Trusted? Quantifying the economic value of blockchain transactions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).

    More about this item

    Keywords

    Airdrops; Blockchain; Decentralized exchanges; Decentralized finance; Expectations; Smart contracts;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:79:y:2023:i:c:s092911992300007x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.