• asset class
• common resource

Decentralized finance (DeFi): why exciting?

blockchain

• "Unbundle" liquidity provision & price discovery 
  • very "non-standard" in finance/econ 
  • Capponi & Jia (2021):
    • volatile exchange rates
      • $\to$ exploitable arbitrage opportunities = losses to liq. providers
    • $\to$ AMM are more likely to be used for "stable" pairs of coins
       
• Mechanical pricing + "tech details" $\to$ malicious behavior?
  • The price computed using contract balances at settlement
    • $\to$ opportunities for front-running while in mempool
    • Buterin (2018 blog post); Park (2021)

Possible issues with AMM? 

• Theory: LOB vs. Bonding Curve AMM DEX
  • pooled liquidity & shared price impact $\to$ may be more liquidity on DEX
• Empirics: 
  • 36,958 liq pools on Uniswap; 43+ million transactions; 2.5 yrs
  • Many cool empirical observations
    • Re: does the pricing function work?
      • Prices on Uniswap & Binance are very close!
      • But: price impact always higher on Binance (and "spiky" on Binance?)

This paper