Behavior of Liquidity Providers in Decentralized Exchanges

Understand

Decentralized exchanges (DEXes) have introduced an innovative trading mechanism, where it is not necessary to match buy-orders and sell-orders to execute a trade.

• DEXes execute each trade individually, and the exchange rate is automatically determined by the ratio of assets reserved in the market.
• Therefore, apart from trading, financial players can also liquidity providers, benefiting from transaction fees from trades executed in DEXes.
• Although liquidity providers are essential for the functionality of DEXes, it is not clear how liquidity providers behave in such markets.