Trust in DeFi: An Empirical Study of the Decentralized Exchange

We provide empirical evidence that the decentralized cryptocurrency exchange can help reach the decentralized consensus of cryptocurrency value. We focus on Binance (the largest centralized cryptocurrency exchange) and Uniswap (the largest decentralized cryptocurrency exchange), and show that investors on Binance and Uniswap trade in response to prices on the two exchanges. More importantly, we find that the size of Uniswap user base exerts an asymmetric impact on investors’ trading. When its size increases, Uniswap user base exerts a larger impact on investors’ trading on Binance towards the Uniswap price, compared to the opposite direction. With a quasi-exogenous shock on Uniswap user base, we establish the causal impact of Uniswap user base on trading. Our results suggest that Uniswap as a decentralized exchange can reflect the consensus of cryptocurrency value that investors believe in because of blockchain’s transparency and trustworthiness. Our findings imply that the decentralized infrastructure built on blockchain and smart contracts can provide an alternative solution to cases where a consensus underwritten by a credible central party is not feasible or too costly to obtain.