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The DeFi Intermediation Chain

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Abstract

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 in the Ethereum blockchain, and how the need to keep these arbitrage opportunities private gives rise to the intermediation chain.

Suggested Citation

  • Pablo D. Azar & Adrian Casillas & Maryam Farboodi, 2024. "The DeFi Intermediation Chain," Liberty Street Economics 20240805, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:98626
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    File URL: https://libertystreeteconomics.newyorkfed.org/2024/08/the-defi-intermediation-chain/
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    More about this item

    Keywords

    financial intermediation; digital assets; intermediation chains;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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