TY - JOUR
T1 - Blockchain-based automated market makers for a decentralized stock exchange
AU - Dodmane, Radhakrishna
AU - K. R., Raghunandan
AU - N. S., Krishnaraj Rao
AU - Kallapu, Bhavya
AU - Shetty, Surendra
AU - Aslam, Muhammad
AU - Jilani, Syeda Fizzah
N1 - Funding Information:
This work did not receive any funding, directly or indirectly, from any source or agency.
Publisher Copyright:
© 2023 by the authors.
PY - 2023/5/9
Y1 - 2023/5/9
N2 - The advancements in communication speeds have enabled the centralized financial market to be faster and more complex than ever. The speed of the order execution has become exponentially faster when compared to the early days of electronic markets. Though the transaction speed has increased, the underlying architecture or models behind the markets have remained the same. These models come with their own disadvantages. The disadvantages are usually faced by non-institutional or small traders. The bigger players, such as financial institutions, have an advantage over smaller players because of factors such as information asymmetry and access to better infrastructure, which give them an advantage in terms of the speed of execution. This makes the centralized stock market an uneven playing field. This paper discusses the limitations of centralized financial markets, particularly the disadvantage faced by non-institutional or small traders due to information asymmetry and better infrastructure access by financial institutions. The authors propose the usage of blockchain technology and the data highway protocol to create a decentralized stock exchange that can potentially eliminate these disadvantages. The data highway protocol is used to generate new blocks with a flexible finality condition that allows for the consensus mechanism to configure security thresholds more freely. The proposed framework is compared with existing frameworks to confirm its effectiveness and identify areas that require improvement. The evaluation of the proposed approach showed that the improved highway protocol boosted the transaction rate compared to the other two mechanisms (PoS and PoW). Specifically, the transaction rate of the proposed model was found to be 2.2 times higher than that of PoS and 12 times higher than that of the PoW consensus model.
AB - The advancements in communication speeds have enabled the centralized financial market to be faster and more complex than ever. The speed of the order execution has become exponentially faster when compared to the early days of electronic markets. Though the transaction speed has increased, the underlying architecture or models behind the markets have remained the same. These models come with their own disadvantages. The disadvantages are usually faced by non-institutional or small traders. The bigger players, such as financial institutions, have an advantage over smaller players because of factors such as information asymmetry and access to better infrastructure, which give them an advantage in terms of the speed of execution. This makes the centralized stock market an uneven playing field. This paper discusses the limitations of centralized financial markets, particularly the disadvantage faced by non-institutional or small traders due to information asymmetry and better infrastructure access by financial institutions. The authors propose the usage of blockchain technology and the data highway protocol to create a decentralized stock exchange that can potentially eliminate these disadvantages. The data highway protocol is used to generate new blocks with a flexible finality condition that allows for the consensus mechanism to configure security thresholds more freely. The proposed framework is compared with existing frameworks to confirm its effectiveness and identify areas that require improvement. The evaluation of the proposed approach showed that the improved highway protocol boosted the transaction rate compared to the other two mechanisms (PoS and PoW). Specifically, the transaction rate of the proposed model was found to be 2.2 times higher than that of PoS and 12 times higher than that of the PoW consensus model.
KW - centralized financial markets
KW - decentralized finance (DeFi)
KW - information asymmetry
KW - liquidity
KW - PoS
KW - PoW
UR - http://www.scopus.com/inward/record.url?scp=85160205966&partnerID=8YFLogxK
U2 - 10.3390/info14050280
DO - 10.3390/info14050280
M3 - Article
AN - SCOPUS:85160205966
SN - 2078-2489
VL - 14
JO - Information (Switzerland)
JF - Information (Switzerland)
IS - 5
M1 - 280
ER -