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Discussion Paper
The DeFi Intermediation Chain
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 ...
Discussion Paper
The Origins of Market Power in DeFi
In our previous Liberty Street Economics post, we introduced the decentralized finance (DeFi) intermediation chain and explained how various players have emerged as key intermediaries in the Ethereum ecosystem. In this post, we summarize the empirical results in our new Staff Report that explains how the need for transaction privacy across the DeFi intermediation chain gives rise to intermediaries’ market power.
Report
Natural Centralization in Decentralized Finance
Can centralization arise absent barriers to entry? We confront this question by studying the Ethereum blockchain, a market featuring permissionless entry, standardized protocols, and a transparent public ledger. We show that natural centralization emerges when information asymmetry confronts risk-sharing. Using a novel dataset distinguishing private from public order flow, we find that a 1 percent increase in the value of private information causally increases an intermediary’s profit share by 0.57 percent. We use a dynamic bargaining model to illustrate that intermediaries leverage private ...
Report
Stablecoins Meet the Mundell–Fleming Trilemma
We study how stablecoins impact global capital flows by constructing a novel wallet-level dataset linking geotagged Ethereum Name Service registrations to stablecoin transactions around banking restrictions, currency crises, sanctions, and monetary disruptions. We find that crisis-country wallets experience significant increases in USD stablecoin inflows and receipt activity during crisis weeks. Motivated by this evidence, we develop a small-open-economy New Keynesian model in which household adoption of programmable stablecoins weakens the government’s enforcement technology for capital ...