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Decentralised dealers? examining liquidity provision in decentralised exchanges

Author

Listed:
  • Matteo Aquilina
  • Sean Foley
  • Leonardo Gambacorta
  • William Krekel

Abstract

Decentralised exchanges allow participants to buy and sell assets without the need for intermediaries, in theory democratising liquidity provision. However, using data from the largest decentralised exchange, we show that liquidity provision – rather than being the purview of a diffused set of market participants – is instead confined predominantly to a small group o f sophisticated ones. These participants submit orders that mimic bids and asks and are able to extract significantly higher profits (both in absolute and relative terms) compared to their unsophisticated counterparts. They also exhibit considerable skill, extracting higher profits during periods of high volatility by capturing a higher share of trading without incurring additional adverse selection.

Suggested Citation

  • Matteo Aquilina & Sean Foley & Leonardo Gambacorta & William Krekel, 2024. "Decentralised dealers? examining liquidity provision in decentralised exchanges," BIS Working Papers 1227, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1227
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    References listed on IDEAS

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    Cited by:

    1. Matteo Aquilina & Giulio Cornelli & Jon Frost & Leonardo Gambacorta, 2025. "Cryptocurrencies and decentralised finance: functions and financial stability implications," BIS Papers, Bank for International Settlements, number 156.

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    More about this item

    Keywords

    market design; market making; liquidity; automated market maker; decentralised finance;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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