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Price Discovery on Decentralized Exchanges

Agostino Capponi¹; Ruizhe Jia²; Shihao Yu³

¹ Columbia University the United States · ² Stanford University the United States · ³ Singapore Management University Singapore

Abstract Decentralized exchanges (DEXs) allow traders to express their willingness to pay for quick execution through a public priority fee bidding mechanism. We provide evidence that high-fee DEX trades are more informative and contribute more to price discovery. Using address-level blockchain transaction data, we show that informed traders persistently bid higher fees to secure early execution, revealing a strong willingness to pay for execution priority. Further, analysis of Ethereum mempool data demonstrates that informed traders employ a “jump bidding” strategy, placing high initial bids to deter potential competitors.

DOI

10.1093/rfs/hhag002

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en

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