Information and Market Power in DeFi Intermediation

Pablo Azar, Adrian Casillas and Maryam Farboodi

No 32949, NBER Working Papers from National Bureau of Economic Research, Inc

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 1% increase in private information advantage leads to a 1.4% 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.

JEL-codes: C83 D82 D86 G23 G29 L86 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-ban, nep-com, nep-fmk, nep-ind, nep-ipr, nep-mac, nep-pay and nep-reg
Note: AP CF
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Working Paper: Information and Market Power in DeFi Intermediation (2024)
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