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: We investigate how private information shapes profit sharing in the DeFi intermediation chain, the market structure emerging from proof-of-stake blockchain technology on Ethereum. Leveraging a unique dataset that distinguishes private and public transactions, we find that a one percent increase in the value of private information leads to a 0.57 percent increase in block builders’ profit share, underscoring the role of information asymmetry in intermediated financial markets. We further develop a dynamic bargaining model that illustrates how private information confers market power to intermediaries. These results extend financial intermediation theory by revealing how blockchain transparency interacts with privacy to sustain arbitrage rents, offering timely insights as DeFi integrates with traditional finance.

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: 41
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 March 2025.
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Citations: View citations in EconPapers (1)

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Working Paper: Information and Market Power in DeFi Intermediation (2024)
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DOI: 10.59576/sr.1102

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