How Efficient is Decentralized Finance (DeFi)?

50 Pages Posted: 27 Mar 2022 Last revised: 29 Nov 2022

See all articles by Paul P. Momtaz

Paul P. Momtaz

University of California, Los Angeles (UCLA) - Anderson School of Management; Technische Universität München (TUM) - TUM School of Management; University College London Center for Blockchain Technologies

Multiple version iconThere are 3 versions of this paper

Date Written: March 22, 2022

Abstract

This paper examines the efficiency of the Initial Coin Offering (ICO) market through a search- theoretical lens. Search intensity associated with the process of identifying valuable startups is increasing in market granularity. Blockchain technology increases market granularity because asset tokenization lowers entry barriers. Lower-end entrants, however, increase aggregate search intensity but may lack search skills. The resulting search-related inefficiency creates a niche for intermediaries or institutional investors that specialize on search. Consistent with the theory, specialized crypto funds increase ICO market efficiency by reducing search frictions, inter alia, by shortening the time-to-funding and increasing the funding amount. At the same time, crypto funds extract sizable economic rents for their intermediation services. Overall, the study relates to the general trade-off between centralization and decentralization in entrepreneurial finance. It suggests that market frictions specific to early-stage crowdfunding of entrepreneurship may prevent “perfectly” Decentralized Finance (DeFi) markets from functioning efficiently.

Keywords: Decentralized Finance (DeFi), Initial Coin Offering (ICO), blockchain-based crowdfunding, tokens, entrepreneurial finance, crypto funds, intermediation, search

JEL Classification: G23, G24, L26

Suggested Citation

Momtaz, Paul P., How Efficient is Decentralized Finance (DeFi)? (March 22, 2022). Available at SSRN: https://ssrn.com/abstract=4063670 or http://dx.doi.org/10.2139/ssrn.4063670

Paul P. Momtaz (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, 80333
Germany

University College London Center for Blockchain Technologies ( email )

UCL CBT UCL Computer Science
Malet Place London WC
London, London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,135
Abstract Views
2,738
Rank
344,377
PlumX Metrics