Blockchain scaling and liquidity concentration on decentralized exchanges
Trading and Market Microstructure
2024-03-20 v4
Abstract
Liquidity providers (LPs) on decentralized exchanges (DEXs) can protect themselves from adverse selection risk by updating their positions more frequently. However, repositioning is costly, because LPs have to pay gas fees for each update. We analyze the causal relation between repositioning and liquidity concentration around the market price, using the entry of blockchain scaling solutions, Arbitrum and Polygon, as our instruments. Lower gas fees on scaling solutions allow LPs to update more frequently than on Ethereum. Our results demonstrate that higher repositioning intensity and precision lead to greater liquidity concentration, which benefits small trades by reducing their slippage.
Keywords
Cite
@article{arxiv.2306.17742,
title = {Blockchain scaling and liquidity concentration on decentralized exchanges},
author = {Basile Caparros and Amit Chaudhary and Olga Klein},
journal= {arXiv preprint arXiv:2306.17742},
year = {2024}
}