Original title: Public Trader Identity: Adverse Selection and Return Predictability
Daojing Zhai · August 2026
Traders who have private information usually try to stay hidden so others cannot copy them. But on one decentralized exchange, every order, cancellation, rejection, and trade publicly shows the trader's pseudonymous wallet address. Researchers studied this public market by tracking wallet actions and the price moves that immediately followed them. They found that skilled trading is not random luck. Wallets that successfully predict price changes keep doing so over time. Furthermore, watching the live trades of these top wallets helps predict price returns one second into the future much better than standard market data alone. In short, when trader identities are public, tracking the best wallets reveals valuable pricing information that normal anonymous markets hide.
Imagine you are trying to guess which students will do well on a test just by looking at the classroom noise level. You get a rough idea, but you miss the fact that some students always study together and share answers. In this paper, the researchers instead look at each student's past quiz scores, which turns out to be a much better predictor of future performance than the overall noise. Here, the classroom noise is the anonymous order-book data, and the individual quiz scores are the public wallet histories.
This matters because it overturns a core assumption of financial markets: that informed traders must hide to profit. On this exchange, their public trading history reveals persistent skill that predicts price moves better than anonymous order-book data. For traders and regulators, it means transparency can carry hidden information, raising questions about market fairness and the value of anonymity.
The abstract does not state limitations explicitly, but the findings are specific to one decentralized exchange and may not generalize to other markets. It does not establish whether the predictive power persists after the method becomes known, nor does it test for causality between wallet activity and returns.
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Public Trader Identity: Adverse Selection and Return Predictability — Daojing Zhai
Abstract licence: CC0
Explanation generated by Synthesis from the abstract — it is not the original paper. This is a preprint, so it hasn't necessarily been peer reviewed.