Information and Market Power in DeFi Intermediation

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 lead...

Full description

Saved in:
Bibliographic Details
Published in:Policy File 2024
Main Authors: Azar, Pablo, Casillas, Adrian, Farboodi, Maryam
Format: Report
Language:English
Subjects:
Arbitrage
Blockchain
Digital currencies
Finance
Online Access:Request full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.