Information and Market Power in DeFi Intermediation

Abstract

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 intermediaries. These results extend financial intermediation theory by revealing how blockchain transparency interacts with privacy to sustain arbitrage rents, offering timely insights as DeFi integrates with traditional finance.

Keywords: financial intermediation, oligopoly, blockchain, decentralized finance, cybersecurity

JEL Classification: G23, D82, L14, L22, G14, D43