Knowledge that Transforms

A decentralized exchange or DEX is an application deployed on a blockchain that allows investors to exchange digital assets at pricing terms determined by a preset exchange rate formula. This technology has several unique features, including accessibility to all investors, transparency of pricing, and simultaneity of execution and settlement. Notably, trading via a DEX is feasible for any asset tokenized on a blockchain. In turn, given that assets such as stocks and bonds could be tokenized easily, it is particularly important to understand the risks posed by DEXs. This paper examines both the benefits and risks to investors from DEXs, explores the role of private and public liquidity pools and analyzes possible regulatory approaches. The Wharton Initiative on Financial Policy and Regulation is directed by Itay Goldstein , the Joel S. Ehrenkranz Family Professor and Professor of Finance at The Wharton School of the University of Pennsylvania. It commissions white papers from leading and emerging experts on a range of topics on financial policy and regulation. For more, see https://wifpr.wharton.upenn.ed u/