Andreas Park PRO
Professor of Finance at UofT
Katya Malinova and Andreas Park
How did these guys put it ...?
1. Multiple trading protocols are possible
User-facing exchange mask
Fully Decentralized, "OTC",
Peer-to-Peer Exchange
2. High Level of Transparency
See transactions between "addresses" (="IDs")
3. You can tell who owns what
Key: wallets/addresses = IDs but NOT = traders
Who benefits and loses under which regime?
Each period one is hit with size Q=1 liquidity shock.
Other can absorb the shock at zero cost.
Disclaimer:
Idea:
Requires a system design choice:
Repeated setting:
Front-running is punished by “grim trigger” & trade forever with small and intermediary.
Single shot:
LP always extracts all surplus (or would front-run).
Closest and native to "public" blockchains:
small traders
large trader
small traders
large trader
small traders
large trader
filled
unfilled
Opaque Single ID
Opaque Multi-ID: LP accepts
Opaque Multi-ID: LP rejects
accept offer
submit large amount to continuum
submit large amount to continuum
front run
Result 1: There exists an equilibrium with no front-running where
provided
Result 2 (numerical): For small discount (=infrequent interaction) factors, the equilibrium with no front-running where LP accept does not exist. Then:
=> over-trading with intermediary
Observations
Finding 3:
For the average equilibrium stage payoffs of large traders.
Finding 4: (Numerical)
There exist parametric configurations such that large traders trade with each other at p > 0 in the multi-ID ownership setting, but their average equilibrium payoff in the opaque single-ID setting is higher.
By Andreas Park
This is a set of slides that I used for a presentation of my paper with Katya Malinova on our paper "Market Design with Blockchain Technology". This iteration was presented on Sept 29, 2017. The deck has been designed for a 20 minute presentation.