Decentralized finance (DeFi) is a disruptive distributed peer to peer system operating through smart contracts. Through the large number of services provided, including lending and borrowing, exchanges trading, margin trading, payments, insurance, and NFT marketplaces, the DeFi ecosystem currently accounts for more than $53 billion USD. We investigate the market microstructure of Automated Market Makers (AMMs), the prominent type of blockchain-based decentralized exchanges which makes up for half of the market capitalization of the DeFi ecosystem. Through a game theoretical model, we show that the liquidity providers lose money to higher gas fee bidding arbitrageurs if exchange rates are volatile. AMMs are adopted only if their token pairs are highly correlated, or of high personal use for investors. We argue that a pricing curve with higher convexity makes the arbitrage problem less severe but also decreases investors’ surplus. We also show that pooling multiple tokens exacerbates the arbitrage problem. We provide statistical support for our main model implications using transaction-level data of AMMs. (joint work with Ruizhe Jia)
About the Speaker:
Agostino Capponi is an Associate Professor in the IEOR Department at Columbia University, where he is also a member of the Data Science Institute. Agostino's research interests are in financial technology, market microstructure, financial networks, and fixed income portfolio optimization. Agostino's research has been funded by major public agencies and private corporations, including the NSF, DARPA, U.S. Department of Energy, IBM, JP Morgan, the Institute for New Economic Thinking, and the Global Risk Institute. Agostino is an Editor of Management Science in the Finance Department. He also serves as a co-editor of Mathematics and Financial Economics, and as the financial engineering area editor of Operations Research Letters and of the Institute of Industrial Engineering Transactions. Agostino also serves as an associate editor of Operations Research, Finance and Stochastics, SIAM Journal on Financial Mathematics, Applied Mathematical Finance, Stochastic Systems, and Stochastic Models. He currently serves as the Chair of the SIAM Activity group in Financial Mathematics and Engineering, and as the Chair of the INFORMS Finance Section. Agostino is a recipient of the NSF CAREER Award, and of the 2019 JP Morgan AI Faculty Research Award. Agostino is a fellow of the Crypto and Blockchain Economic Research Forum, an external research fellow of the Fintech@Cornell initiative, and an academic fellow of the Luohan Academy established by the Alibaba Group.
Meeting Number：835 4045 8628
Your participation is warmly welcomed!