Integrating decentralized finance mechanisms with DAOs: decentralized exchanges between liquidity and autonomous governance

Abstract

Decentralized Exchanges (DEXs) are among the most compelling innovations in the DeFi space. Unlike traditional and centralized exchanges, a DEX allows buyers and sellers to interact directly and exchange their digital assets without having to trust an intermediary or each other. This chapter first discusses how DEXs work and their various liquidity provision and pricing mechanisms, as well as their benefits and pitfalls. It then explores the relationship between liquidity supply and concentrated governance token holdings, which could potentially undermine the decentralization of platform governance and prevent the emergence and existence of truly decentralized autonomous governance. Finally, it briefly discusses possible policy implications that arise from the interaction between liquidity provision, governance, and decentralization.