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.
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