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Information and Market Power in DeFi Intermediation

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Abstract

The decentralized nature of blockchain markets has given rise to a complex and highly heterogeneous market structure, gaining increasing importance as traditional and decentralized (DeFi) finance become more interconnected. This paper introduces the DeFi intermediation chain and provides theoretical and empirical evidence for private information as a key determinant of intermediation rents. We propose a repeated bargaining model that predicts that profit share of Ethereum market participants is positively correlated with their private information, and employ a novel instrumental variable approach to show that a 1 percent increase in the value of intermediaries’ private information leads to a 1.4 percent increase in their profit share.

Suggested Citation

  • Pablo D. Azar & Adrian Casillas & Maryam Farboodi, 2024. "Information and Market Power in DeFi Intermediation," Staff Reports 1102, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:98219
    DOI: 10.59576/sr.1102
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    References listed on IDEAS

    as
    1. Michael Sockin & Wei Xiong, 2020. "A Model of Cryptocurrencies," NBER Working Papers 26816, National Bureau of Economic Research, Inc.
    2. Jason Milionis & Ciamac C. Moallemi & Tim Roughgarden, 2023. "Automated Market Making and Arbitrage Profits in the Presence of Fees," Papers 2305.14604, arXiv.org.
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    More about this item

    Keywords

    financial intermediation; oligopoly; blockchain; decentralized finance; cybersecurity;
    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
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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