How Do DeFi Markets Discover the “Right” Price?

SKBI Newsletter | October 2026

As DeFi (decentralized finance) transforms the way financial assets are traded, decentralised exchanges (DEXs), in contrast to traditional centralised exchanges, are emerging as an important new form of trading platform. An SMU study examines the important question of how these new markets discover the “right” price as information arrives.

Key Messages:

• On DEXs, traders can pay higher “priority fees” to have their transactions processed earlier. This gives relatively better-informed traders greater incentives to pay for speed.
• But paying for speed can reveal valuable information. Because priority fees are publicly visible, a high fee can signal that a trade contains valuable information, allowing other traders to react.
• Despite this trade-off, better-informed traders still pay aggressively for speed. They are concerned that other traders may act first and the opportunity may be lost. This “competition mechanism” helps new information enter market prices, allowing DeFi markets to move towards the “right” price.

Overall, the study shows that priority-fee competition on DEXs can help new information enter market prices, allowing the market to move towards the “right” price.

Capponi, A., Jia, R. and Yu, S., 2026. Price discovery on decentralized exchanges. Review of Financial Studies.

As one of the world’s most rapidly ageing societies, Japan’s journey towards digitalisation has created new vulnerabilities, particularly for older citizens who may be less digitally fluent. We speak to Takako Masai and her team at SBI Financial and Economic Research Institute to hear more on this topic. 

Key Challenges:

• Given the fee competition on DEXs, trading systems need credible technical, legal and financial architecture. Otherwise, the market could risk devolving into heated competition among short-term traders.
• It is important not to overlook long-term investors in discovering the “right” price. Their motivations and incentives could be quite different from those of short-term investors.
• The dominance of short-term traders, together with fragmented liquidity, could raise challenges for transparent price discovery on DEXs, compared with exchange-style centralised markets.
   

Overall, Yong Ngee commented that “Prof Shihao’s research sheds lights on trading mechanisms and hence is particularly useful to improve trading practices especially for institutional investors who rely heavily on advanced trading mechanisms.”