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Staff Reports

Information and Market Power in DeFi Intermediation

Number 1102
May 2024 Revised September 2024

JEL classification: G23, D82, L14, L22, G14, D43

Authors: 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 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.

Full Article

Author Disclosure Statement(s)

Pablo Azar
I want to disclose that I own:
1. Profits interests in Algorand Inc. and affiliated entities valued at more than $10,000.
2. Less than $10,000 worth of Ripple and Monero in a Binance account.

Adrian Casillas
The author, Adrian Casillas, declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staffreports/index.html.

Maryam Farboodi
The author, Maryam Farboodi, declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Suggested Citation:
Azar, Pablo, Adrian Casillas, and Maryam Farboodi. 2024. “Information and Market Power in DeFi Intermediation.” Federal Reserve Bank of New York Staff Reports, no. 1102, May. https://doi.org/10.59576/sr.1102

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