Price Discovery and Efficiency in Uniswap Liquidity Pools

Abstract

Using almost three years of minute-level data, we show that the efficiency of Uniswap v3 is much improved relative to v2, and some v3 pools are approaching or even exceeding Bitstamp in terms of price discovery ability. Regression results suggest that the channels of influence for these improvements are an increase in informed liquidity providers and swappers, who nevertheless prefer to use centralized exchanges when markets become volatile. At such times, there are relatively more uninformed speculative traders in all Uniswap pools, and cross-exchange arbitrage activities become more prevalent. However, these decrease the price discovery ability of Uniswap pools relative to Coinbase and Bitstamp. The informed traders that remain on Uniswap during periods of high uncertainty tend to switch to the higher-fee v3 pools to compensate for efficiency loss, or to v2 pools where there is sufficient liquidity to complete large trades.