Response to 'The Evolution of Decentralized Exchanges'

What are DEXs?

DEXs are peer-to-peer marketplaces where transactions occur directly between crypto traders. DEXs fulfill one of crypto’s core possibilities: fostering financial transactions that aren’t officiated by banks, brokers, or any other intermediary. Because of these core functions, DEXs enable equal access to all investors globally, provide full transparency in pricing and execution, form the basis of permissionless market creation, are interoperable with other financial use cases, and settle transactions almost instantly and with very low costs.

However, DEXs have novel tradeoffs and risks due to the public nature of blockchains, including smart contract bugs and hacks, permissionless usage, key management, and transaction ordering and maximum extractable value (MEV).

Main Findings 

The authors have a deep understanding of the evolution of financial markets, market structures, pricing schedules, order routing and execution, and many other factors that are relevant to DEXs. Combined with an advanced technical deep dive into every aspect of a DEX, the analysis fairly places DEXs on a continuum of innovation in market technology. Importantly, the authors look at the full stack of a transaction’s lifecycle including peer to peer networking, block building, validators, and MEV technologies such as private orderflow, MEV refunds, and MEV-Boost. This level of depth is differentiated from previous academic research and strengthens the article’s conclusions. 

While there is surely a place where regulation will be beneficial for customer protection, the authors recommend regulators take a light, rather than heavy-handed, approach to regulation. DEXs are unstoppable code that run on decentralized blockchains, making them available globally. As the paper acknowledges, this can create issues beyond a national scale—a regulator could limit or prohibit access to a DEX in a particular country, but trading would proceed in other countries. Therefore, many of the approaches for DEX regulation may not be effective at accomplishing their intended goals and have adverse consequences, which can decrease the security and reliability of DEXs. Certain DEX challenges, such as MEV, are also being addressed through market mechanisms and technical innovations without the need for regulators to step in. 

Taking a light handed approach to regulating DEXs while leveraging the existing regulatory oversight of centralized exchanges will allow the technology to get off the ground and has the potential to foster DEXs’ many benefits, including accessibility to all investors, transparency of pricing, and simultaneity of execution and settlement.

Conclusion 

We look forward to continued deep engagement with academics, regulators, and policymakers worldwide in developing sensible crypto regulations. 

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