Information and Market Power in DeFi Intermediation
From Pablo Azar, Adrian Casillas and Maryam Farboodi
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 transaction 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.
From Our Researchers
Maryam Farboodi
Jon D. Gruber Career Development Associate Professor
Maryam Farboodi is the Jon D. Gruber Career Development Associate Professor and an Associate Professor of Finance at the MIT Sloan School of Management. Her research focuses on the economics of big data. She studies how big data technologies have…
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Current Cryptocurrency projects from the Consumer Finance Initiative cover topics including the Terra Luna crash, crypto arbitrage and bitcoin and blockchain technology. Find more Cryptocurrency research here.