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Discussion Paper
The Origins of Market Power in DeFi
In our previous Liberty Street Economics post, we introduced the decentralized finance (DeFi) intermediation chain and explained how various players have emerged as key intermediaries in the Ethereum ecosystem. In this post, we summarize the empirical results in our new Staff Report that explains how the need for transaction privacy across the DeFi intermediation chain gives rise to intermediaries’ market power.
Discussion Paper
The DeFi Intermediation Chain
Decentralized Finance, or DeFi, is a rapidly growing ecosystem of financial applications built on blockchain technology, primarily on the Ethereum network. These applications aim to recreate traditional financial instruments and services, such as lending, borrowing, trading, and insurance. The DeFi intermediation chain connects a series of intermediaries who find arbitrage opportunities, aggregate transactions into blocks, validate these blocks, and ultimately append them to the blockchain. In this post, we summarize results from our staff report describing how arbitrage opportunities arise ...
Report
Information and Market Power in DeFi Intermediation
We investigate how private information shapes profit sharing in the DeFi intermediation chain, the market structure emerging from proof-of-stake blockchain technology on Ethereum. Leveraging a unique dataset that distinguishes private and public transactions, we find that a one percent increase in the value of private information leads to a 0.57 percent increase in block builders’ profit share, underscoring the role of information asymmetry in intermediated financial markets. We further develop a dynamic bargaining model that illustrates how private information confers market power to ...