Information and Market Power in DeFi Intermediation

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 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.