Price discovery on centralized and decentralized cryptocurrency exchanges

Cryptocurrencies are traded in two very different types of venues: centralized exchanges such as Coinbase, and blockchain-based decentralized exchanges like Uniswap. Coinbase leverages the well-established limit order book to facilitate trade, while Uniswap employs automated market making. Also, price updates on Coinbase happen instantly after orders match, while those on Uniswap are restricted by the time the underlying blockchain creates new blocks. In view of these disparities, we study each trading venue’s contribution to overall cryptocurrency price discovery. The study uses Coinbase’s ETH/USD pair as well as data for Uniswap’s ETH/USDC pools on three distinct blockchains to calculate the different venues’ information shares and component shares. We show that Coinbase dominates Uniswap in terms of price discovery in any form. This finding holds across several variations of the empirical approach. Latency in price updates due to a blockchain’s hard-coded block time appears to be the main price discovery impediment. Furthermore, we show that overall trading volume and market volatility notably affect Uniswap’s share in price discovery