Governance analysis of decentralized exchange applications

Abstract

Blockchaintechnologyhasintroducedthepossibilitytoexchangevalueandinformationthroughtheinternet without the supervision or permission from any third party intermediary. While many private and public entities have seen this as a chance to increase their operational efficiency, other ventures have been utilizing this sameedgeasameantodevelopnewinstitutionalregimesgiventheimpactontransactioncostreduction, The theories central to institutional economics claim that transaction costs are the ultimate driver for shifts in institutional settings. The purpose of the following research was to investigate whether the reduction in transaction costs allowed by blockchain technology is effectively causing new forms of institutions to arise. Given that blockchain is still in its infancy, there is a current lack of academic literature addressing its governance edge. Furthermore, the few studies available adopt a comparative approach, hence failing to explore the entirety of new institutional possibilities. For this reason, the following research utilized the Institutional Analysis and development framework developed by Elinor Ostrom as a holistic and institutional agnostic methodofanalysis. The particular application analyzed was the one of financial product exchanges. Today, the exchange of financial products as securities, is coordinated by hierarchical organizations, namely firms. As a matter of fact, multiple different firms are involvedintheexchangeoftheseproducts. Exchangesareresponsibleformatching buyers and sellers, clearing houses assume counter party risks and make sure the trading parties can meet their obligations, and custodians and central security depositories are responsible for the final settlement of transactions. Furthermore, reconciliation costs are incurred by all participants when updating their respective databases. Given that blockchains are fundamentally public distributed records of transaction, they effectively undermine the economic efficiency and logic of the current systems of clearing, settlement andreconciliation. Decentralized exchanges are tackling these issues today. For the purpose of the analysis a total of three decentralized exchanges were shortlisted from the over 200 existing. The first filter of choice was to choose between exchanges native to the Ethereum blockchain. This because, being the oldest in the space, they present the most well developed and resilient communities apt for the analysis. Next, exchanges were further filtered by total liquidity in the protocol, or total value locked, and trading volume. The three exchanges selected for the analysis in the end were Uniswap, Sushiswap and Curve. Given that these protocols run on a public and permissionless blockchain, it was possible to retrieve large amounts of data on their relative performance. A number of data acquisition and analytics platforms were utilized for data analysis and visualization namely, Dune, Tally and Sybil