Information and Market Power in DeFi Intermediation

Pablo Azar, Adrian Casillas () and Maryam Farboodi ()
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Maryam Farboodi: https://mitsloan.mit.edu/faculty/directory/maryam-farboodi

No 1102, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper considers the “DeFi intermediation chain”—the market structure that underlies the creation and distribution of ETH, the native cryptocurrency of Ethereum—to examine how information asymmetry shapes intermediation rents. We argue that using proof-of-stake blockchain technology in DeFi leads to a novel limit to arbitrage, arising from the tension between arbitrageurs’ privacy needs and blockchain transparency. Using a new dataset which distinguishes private and public transactions in Ethereum, we find that a one percent increase in private information advantage leads to a 1.4 percent increase in intermediaries’ profit share. We develop a dynamic bargaining model that predicts information market power stems exclusively from participants’ private information advantage. Our analysis illustrates how blockchain technology can sustain arbitrage opportunities despite low entry barriers.

Keywords: financial intermediation; oligopoly; blockchain; decentralized finance; cybersecurity (search for similar items in EconPapers)
JEL-codes: D43 D82 G14 G23 L14 L22 (search for similar items in EconPapers)
Pages: 40
Date: 2024-05-01
New Economics Papers: this item is included in nep-ban, nep-com, nep-fdg, nep-ind, nep-pay and nep-reg
Note: Revised September 2024.
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Working Paper: Information and Market Power in DeFi Intermediation (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:98219

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DOI: 10.59576/sr.1102

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