Fragmentation of Distributed Exchanges

TL;DR

This paper models how geographical and infrastructural disparities can cause fragmentation in distributed exchanges, showing that local miners with speed advantages can dominate, but cross-region exchanges remain feasible under certain asymmetry conditions.

Contribution

It introduces an economic model of decentralized exchanges with two miner clusters and estimates the impact of infrastructure asymmetry on exchange fragmentation through simulations.

Findings

Speed advantage increases with infrastructure asymmetry

Cross-region DEXs are feasible if activity and infrastructure asymmetry are correlated

Fragmentation depends on the economic value transfer between clusters

Abstract

Distributed securities exchanges may become de facto fragmented if they span geographical regions with asymmetric computer infrastructure. First, we build an economic model of a decentralized exchange with two miner clusters, standing in for compact areas of economic activity (e.g., cities). "Local" miners in the area with relatively higher trading activity only join a decentralized exchange if they enjoy a large speed advantage over "long-distance" competitors. This is due to a transfer of economic value across miners, specifically from high- to low-activity clusters. Second, we estimate the speed advantage of "local" over "long-distance" miners in a series of Monte Carlo experiments over a two-cluster, unstructured peer-to-peer network simulated in C. We find that the speed advantage increases in the level of infrastructure asymmetry between clusters. Cross-region DEX blockchains are feasible as long as the asymmetry levels in trading activity and infrastructure availability across regions are positively correlated.