💥SWIFT: Digital Assets and Markets: A transaction-cost analysis of market architectures💥
This report examines the market landscape for digital assets, including digitally recorded traditional securities and cryptographically secured tokens that represent the building blocks of the future tokenized economy.
First, we describe the major asset categories, comparing traditional, centralized ways of recording asset ownership with cryptographically secured and distributed ownership records. Then compare traditional and tokenized forms of equities, fiat currencies and stablecoins, cryptocurrencies, and
other digital tokens. We explain how subtle changes in how asset ownership is recorded has fundamental implications for financial market infrastructure including custodianship, trading, and settlement. For example, cryptographically secured tokens can facilitate real-time risk-free settlement of individual trades, reducing or eliminating the need for a clearinghouse, yet create new challenges in custodianship and safekeeping of assets.
Second, is a description of different trading mechanisms for investors by analyzing a variety of onchain and off-chain market architectures. We compare centralized limit order book markets, decentralized limit order books, and decentralized liquidity pools (automated market makers, AMMs), in terms of structure, performance, and suitability for trading different assets. We show that there are substantially differences between these market types in settlement risks, latency, and throughput capacity.
Third, based on an extensive sample of data to empirically analyze trading costs, we compare the efficiency of different market types (e.g., limit order books vs AMMs) and trading pairs (crypto-crypto, crypto-fiat, digital-fiat, stablecoins). We show that markets for decentralized assets are currently more costly and less efficient than centralized limit order book markets, but the difference is largely because decentralized markets are in their infancy and have not reached the volumes traded in centralized markets. And that as volume shifts to the new market types, their costs fall, narrowing the liquidity gap between centralized and decentralized market architectures – a trend that is expected to continue.
This analysis provides a guide for investors selecting markets to trade digital assets and has implications for how financial market infrastructure is likely to evolve as more assets join the “tokenized economy”.