We compare the market quality of centralized crypto exchanges (CEXs) such as Binance and Kraken to decentralized blockchain-based venues (DEXs) such as Uniswap v2 and v3.

After discussing the microstructure of such exchanges, we analyze two key aspects of market quality: transaction costs and deviations from the no-arbitrage condition.

We find that CEXs and DEXs operate on roughly equal footing in terms of transaction costs, particularly in light of recent innovations in DEX protocols.

Moreover, while CEXs provide superior price efficiency, DEXs eliminate custodian risk.

These complementary advantages may explain why both market structures coexist.

In contrast to centralized exchanges (CEXs) which match orders continuously following a price-time priority rule, decentralized exchanges (DEXs) process orders in discrete time and require traders to bid a blockchain priority fee to determine the execution priority of their orders. We employ a structural vector-autoregressive (structural VAR) model to provide evidence that blockchain fees attached to DEX trades reveal their private information, contributing to price discovery. We show that informed traders bid higher fees not only to avoid execution risk resulting from blockchain congestion but also to compete with each other. Using a unique dataset of Ethereum mempool orders, we further demonstrate that informed traders mostly compete on DEXs through a jump bidding strategy.

How do cryptocurrency exchanges compete with each other? We show that small and large crypto exchanges appear to be complements, rather than substitutes, as traditional oligopoly theory would predict. When large exchanges list new tokens, trade volumes on small exchanges increase, and small exchanges become more likely to list. We rationalize these facts in a model where small exchanges have captive customer bases, and rely on arbitrage trade with large exchanges for liquidity provision. Our results imply that large exchanges’ listing decisions play a systemically important “leader” role in determining trade volumes and listings on other exchanges.