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| Main Authors: | , , |
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| Format: | Preprint |
| Published: |
2023
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| Subjects: | |
| Online Access: | https://arxiv.org/abs/2307.13772 |
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| _version_ | 1866910454816702464 |
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| author | Lehar, Alfred Parlour, Christine Zoican, Marius |
| author_facet | Lehar, Alfred Parlour, Christine Zoican, Marius |
| contents | We investigate how liquidity providers (LPs) choose between high- and low-fee trading venues, in the face of a fixed common gas cost. Analyzing Uniswap data, we find that high-fee pools attract 58% of liquidity supply yet execute only 21% of volume. Large LPs dominate low-fee pools, frequently adjusting out-of-range positions in response to informed order flow. In contrast, small LPs converge to high-fee pools, accepting lower execution probabilities to mitigate adverse selection and liquidity management costs. Fragmented liquidity dominates a single-fee market, as it encourages more liquidity providers to enter the market, while fostering LP competition on the low-fee pool. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2307_13772 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | Fragmentation and optimal liquidity supply on decentralized exchanges Lehar, Alfred Parlour, Christine Zoican, Marius Trading and Market Microstructure We investigate how liquidity providers (LPs) choose between high- and low-fee trading venues, in the face of a fixed common gas cost. Analyzing Uniswap data, we find that high-fee pools attract 58% of liquidity supply yet execute only 21% of volume. Large LPs dominate low-fee pools, frequently adjusting out-of-range positions in response to informed order flow. In contrast, small LPs converge to high-fee pools, accepting lower execution probabilities to mitigate adverse selection and liquidity management costs. Fragmented liquidity dominates a single-fee market, as it encourages more liquidity providers to enter the market, while fostering LP competition on the low-fee pool. |
| title | Fragmentation and optimal liquidity supply on decentralized exchanges |
| topic | Trading and Market Microstructure |
| url | https://arxiv.org/abs/2307.13772 |