Exploring the Impact: How Decentralized Exchange Designs Shape Traders’ Behavior on Perpetual Future Contracts

ArXiv ID: 2402.03953 “View on arXiv”

Authors: Unknown

Abstract

In this paper, we analyze traders’ behavior within both centralized exchanges (CEXs) and decentralized exchanges (DEXs), focusing on the volatility of Bitcoin prices and the trading activity of investors engaged in perpetual future contracts. We categorize the architecture of perpetual future exchanges into three distinct models, each exhibiting unique patterns of trader behavior in relation to trading volume, open interest, liquidation, and leverage. Our detailed examination of DEXs, especially those utilizing the Virtual Automated Market Making (VAMM) Model, uncovers a differential impact of open interest on long versus short positions. In exchanges which operate under the Oracle Pricing Model, we find that traders primarily act as price takers, with their trading actions reflecting direct responses to price movements of the underlying assets. Furthermore, our research highlights a significant propensity among less informed traders to overreact to positive news, as demonstrated by an increase in long positions. This study contributes to the understanding of market dynamics in digital asset exchanges, offering insights into the behavioral finance for future innovation of decentralized finance.

Keywords: Market Microstructure, Perpetual Futures, Decentralized Finance (DeFi), Behavioral Finance, Volatility, Cryptocurrency

Complexity vs Empirical Score

• Math Complexity: 4.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Street Traders
• Why: The paper’s math complexity is moderate, relying on established models like Kyle’s and Shalen’s dispersion of beliefs rather than dense novel derivations. However, empirical rigor is high, featuring extensive data collection from multiple blockchain sources, daily-level frequency analysis, and direct testing of hypotheses on real trading data.

  flowchart TD
    A["Research Goal"] -->|Analyze| B["Trader Behavior on<br>CEX vs. DEX Perpetual Futures"]
    
    B --> C{"Methodology"}
    C -->|Categorize| D["Exchange Architectures<br>VAMM, Oracle, Hybrid"]
    C -->|Analyze| E["Data: Volume, Open Interest,<br>Liquidation, Leverage"]
    
    D --> F["Computational Process<br>Volatility & Correlation Analysis"]
    E --> F
    
    F --> G["Key Findings & Outcomes"]
    
    subgraph G [" "]
        direction TB
        H["VAMM Model:<br>Differential impact on Long vs. Short"]
        I["Oracle Model:<br>Traders act as Price Takers"]
        J["Behavioral Insight:<br>Informed traders overreact to positive news"]
    end