Competition between DEXs through Dynamic Fees

2026-03-10

AI Summary

This study investigates the equilibrium pricing strategies of multiple decentralized exchanges (DEXs) competing for order flow under dynamic fee mechanisms. By formulating a game-theoretic model and characterizing the approximate Nash equilibrium through coupled partial differential equations, the authors derive an analytical approximation for the equilibrium fees. The analysis reveals that the equilibrium fee structure retains a two-regime form, but the switching boundary shifts from the oracle price to a weighted average of the oracle price and the competitor’s exchange rate. Furthermore, the impact of competition on slippage is non-monotonic: holding total liquidity constant, increasing the number of DEXs reduces both execution slippage for strategic traders and fee revenue per platform, while slippage for noise traders depends on market activity—benefiting from higher activity in liquid markets.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Search and Optimization: Other Foundations of Search & Optimization

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Security and Privacy: Cryptocurrency and smart contracts
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

We find an approximate Nash equilibrium in a game between decentralized exchanges (DEXs) that compete for order flow by setting dynamic trading fees. We characterize the equilibrium via a coupled system of partial differential equations and derive tractable approximate closed-form expressions for the equilibrium fees. Our analysis shows that the two-regime structure found in monopoly models persists under competition: pools alternate between raising fees to deter arbitrage and lowering fees to attract noise trading and increase volatility. Under competition, however, the switching boundary shifts from the oracle price to a weighted average of the oracle and competitors' exchange rates. Our numerical experiments show that, holding total liquidity fixed, an increase in the number of competing DEXs reduces execution slippage for strategic liquidity takers and lowers fee revenue per DEX. Finally, the effect on noise traders' slippage depends on market activity: they are worse off in low-activity markets but better off in high-activity ones.

Problem

• Decentralized Exchanges
• Dynamic Fees
• Order Flow Competition
• Nash Equilibrium
• Slippage

Innovation

• Dynamic fees
• Decentralized exchanges
• Nash equilibrium
• Order flow competition
• Slippage