Decentralized Exchanges for Stablecoins
Wenqian Huang (Bank of Internal Settlement); Natalia Rostova (EDHEC Business School); Zhaogang Song (Johns Hopkins University)
Abstract
We examine decentralized exchanges (DEXs) like Curve that specialize in stablecoin trading, which co-exist with centralized exchanges (CEXs) like Binance. We develop a simple model of stablecoin trading in which a DEX uses a low-convexity bonding curve to determine trading prices, liquidity traders choose between the DEX and CEX conditional on trade size, and an arbitrageur trades to profit from price staleness when the stablecoin experiences a de-peg shock. Using trade-level data of stablecoins, we empirically confirm the implications of the model’s main economic mechanism—the price impact is lower on the DEX than on the CEX—for liquidity traders’ venue choice, the arbitrage trading volume, and the price deviation from peg. Our analyses inform the market design of stablecoin trading.