On the Quality of Cryptocurrency Markets: Centralized vs. Decentralized Exchanges

We analyze the market quality of centralized crypto exchanges and decentralized blockchain-based venues (DEXs) using a unique and comprehensive data set. Focusing on two fundamental aspects, transaction costs and deviations from the no-arbitrage condition, we estimate the causal effect of gas fees on DEX market quality. We show that these fixed costs impose a significant burden on relatively small trades and cause persistent arbitrage deviations. Conversely, DEXs offer more competitive transaction costs for larger trades, offering a more favorable environment for institutional investors. Furthermore, we provide causal evidence that innovations aimed at enhancing the flexibility of liquidity provision in DEX markets lead to sizeable improvements in market quality. This paper was accepted by Agostino Capponi, finance. Funding: A. Ranaldo acknowledges financial support from the Swiss National Science Foundation nccr–on the move [Grant 204721]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.07703 .