Transaction Execution on Ethereum Decentralized Exchanges (DEX) From a Legal Perspective


Decentralized Finance (DeFi) on Ethereum lacks a clear legal framework akin to what exists in traditional financial markets, leading to uncertainty for traders, intermediaries, and other market participants regarding their protections, responsibilities, and risk exposures. Key concepts like what constitutes a “transaction,” who serves as a transaction counterparty, and what duties are owed remain undefined. This paper aims to clarify the legal journey of Ethereum transactions, focusing on the stages of trade instruction and execution. We examine the complex technical processes and actors involved, highlight areas where end-user expectations may be violated, discuss potential sources of legal liability, and explore whether certain DeFi activities like DEX trading should be governed by contract law. The paper assesses various parties, including validators, DEX liquidity providers, and smart contracts themselves, as potential legal counterparties to a DeFi trader. Based on this analysis, we provide recommendations for the development of a legal framework to enhance certainty and efficiency in DeFi markets. Establishing clear rules around trade instruction, execution, and liability allocation would enable more accurate risk assessment, support market participation and liquidity, and facilitate the healthy development of the DeFi ecosystem.