We analyze the market microstructure of Automated Market Maker (AMM ), the most prominent type of blockchain-based decentralized crypto exchange . We show that , even without information asymmetries, liquidity providers lose token value if exchange rates are volatile due to the order execution mechanism of the blockchain-based exchange . AMMs are more likely to be adopted for pairs of coins which are stable or of high personal use for investors  . Liquidity providers may not deposit their tokens if the exchange rate volatility is high, leading to a liquidity freeze. The adoption of AMMs leads to a surge of transaction fees on the underlying blockchain if token exchange rates fluctuate wildly. We provide empirical support for our  model implications using transaction-level data of AMMs.
We investigate the market microstructure of Automated Market Makers (AMMs ), the most prominent type of blockchain-based decentralized exchanges . We show that the order execution mechanism yields token value loss for liquidity providers if token exchange rates are volatile . AMMs are adopted only if their token pairs are of high personal use for investors , or the token price movements of the pair are highly correlated. A pricing curve with higher curvature reduces the arbitrage problem but also investors' surplus. Pooling multiple tokens exacerbates the arbitrage problem . We provide statistical support for our main model implications using transaction-level data of AMMs.
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analyze
investigate
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Maker (AMM
Makers (AMMs
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crypto exchange
exchanges
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, even without information asymmetries, liquidity providers lose token value if
the order execution mechanism yields token value loss for liquidity providers if token
D
due to the order execution mechanism of the blockchain-based exchange
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more likely to be adopted for pairs of coins which are stable or
adopted only if their token pairs are
A
, or the token price movements of the pair are highly correlated. A pricing curve with higher curvature reduces the arbitrage problem but also investors' surplus. Pooling multiple tokens exacerbates the arbitrage problem
D
Liquidity providers may not deposit their tokens if the exchange rate volatility is high, leading to a liquidity freeze. The adoption of AMMs leads to a surge of transaction fees on the underlying blockchain if token exchange rates fluctuate wildly.
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empirical
statistical
A
main