Blockchain Private Pools and Price Discovery

Abstract

In this paper, we examine the balance between allocative efficiency and price discovery in blockchain-based finance. Our analysis reveals that the use of private pools, while improving blockspace allocation efficiency, negatively impacts price discovery. We show that the presence of private pools limits the amount of information revealed through pending orders and increases the execution risk of informed orders. We argue that price discovery can be improved by increasing the number of validators monitoring private pools or the block production rate on the chain.