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Liquidity mechanisms in decentralized finance: Design, fragmentation, and arbitrage in real-world asset markets
Ralf Laschinger1, Heiko Leonhard2, Gregor Dorfleitner3, Wolfgang Schäfers4
1LMU Munich School of Management, Germany; 2International Real Estate Business School, University of Regensburg; 3Department of Finance, University of Regensburg; 4International Real Estate Business School, University of Regensburg
Discussant: Ryan Riordan (LMU)
Tokenization of real-world assets (RWAs) promises enhanced accessibility and tradability in traditionally illiquid markets. Yet, achieving sustained liquidity and efficient price discovery in digital asset markets remains uncertain. We examine three liquidity mechanisms—automated market makers (AMMs), peer-to-peer (P2P) marketplaces, and centralized buybacks—using a dataset of 444,535 tokenized RWA transactions (2019–2024). We document arbitrage-driven liquidity flows, market fragmentation, and variations in investor sophistication. AMMs provide continuous liquidity but face systematic arbitrage-induced drainage. P2P marketplaces facilitate efficient price discovery, while buybacks offer stable yet inflexible exits. Our findings highlight the necessity of hybrid liquidity models integrating centralized and decentralized features; otherwise, RWA markets risk evolving into fragmented digital search markets rather than efficient trading ecosystems.
12:00pm - 12:30pm
SOFR so good: Transaction costs and resilience in the post-Libor swap market
Jan Gabriel Roth, Anders Bjerre Trolle
Copenhagen Business School, Denmark
Discussant: Heiko Leonhard (University of Regensburg)
Using novel transaction and quote data, we show that transaction costs in the SOFR swap market are 1) low on average; 2) higher for client-to-dealer than interdealer trades reflecting differences in (permanent) price impact; 3) increase in trade size (measured in terms of interest rate risk), are lower for package transactions, and increase in interest rate volatility, client order imbalance, and dealer credit spreads; 4) moderately higher than for similar-sized interdealer Treasury trades; 5) stable over time, except during the banking crisis in March 2023 and the tariff-induced crisis in April 2025. Overall we determine that the SOFR swap market operates efficiently, though the functioning of the client-to-dealer segment may deteriorate somewhat during crisis periods.
12:30pm - 1:00pm
Fragmented liquidity and predictable jumps
Saad Ali Khan1, Ryan Riordan2
1HEC Montreal, Canada; 2LMU Munich, Germany
Discussant: Jan Gabriel Roth (Copenhagen Business School)
Price jumps are predictable using simple order book depth statistics. We examine the relationship between liquidity fragmentation, consolidated depth, and stock price jumps for S&P 500 stocks. Using a stylized model, we posit that liquidity suppliers fragment offered liquidity and reduce depth to manage risk from arbitrage during days with high expected jump intensity. Consistent with our model's predictions we find 80% (19%) more jumps when fragmentation (depth) increases (decreases). The findings suggest that market-makers anticipate volatility and the associated adverse selection cost providing traders with advance warning.
