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Blockchain Private Pools and Price Discovery

Author

Listed:
  • Agostino Capponi
  • Ruizhe Jia
  • Ye Wang

Abstract

In 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.

Suggested Citation

  • Agostino Capponi & Ruizhe Jia & Ye Wang, 2023. "Blockchain Private Pools and Price Discovery," AEA Papers and Proceedings, American Economic Association, vol. 113, pages 253-256, May.
    • Handle: RePEc:aea:apandp:v:113:y:2023:p:253-56
    DOI: 10.1257/pandp.20231030
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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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