Blockchain Private Pools and Price Discovery
AbstractIn this paper, we examine the balance between allocative efficiency and price discovery in blockchain-based finance. Our analysis reveals that the use of private pools, while improving blockspace allocation efficiency, negatively impacts price discovery. We show that the presence of private pools limits the amount of information revealed through pending orders and increases the execution risk of informed orders. We argue that price discovery can be improved by increasing the number of validators monitoring private pools or the block production rate on the chain.
CitationCapponi, Agostino, Ruizhe Jia, and Ye Wang. 2023. "Blockchain Private Pools and Price Discovery." AEA Papers and Proceedings, 113: 253-56. DOI: 10.1257/pandp.20231030
- D61 Allocative Efficiency; Cost-Benefit Analysis
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]