Natural Centralization in Decentralized Finance (joint with Adrian Casillas and Maryam Farboodi)

Time & Location: Friday, December 5, 1:30pm - 2:30pm at SEC LL 2.221

Title: Natural Centralization in Decentralized Finance (joint with Adrian Casillas and Maryam Farboodi)

 

Abstract: 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% increase in the value of private information causally increases an intermediary’s profit share by 0.57%. We use a dynamic bargaining model to illustrate that intermediaries leverage private information by threatening to withhold valuable trades, creating an outside option that sustains their market power. Our results provide causal evidence that information can be a fundamental source of endogenous centralization in the market structure, demonstrating how natural oligopolies can emerge even in purportedly decentralized economies.

Bio: Pablo Azar is a Financial Research Economist at the Federal Reserve Bank of New York, where he focuses on the financial stability implications of cryptocurrencies. His work draws on interdisciplinary training from dual PhDs in Economics and Computer Science from MIT, complemented by industry experience as Chief Economist at Algorand, where he contributed to the economic design and launch of its blockchain protocol. His research has appeared in leading economics journals and computer science conferences, has informed policy discussions including U.S. Congressional hearings, and has been featured in outlets such as the Financial Times, Bloomberg, The Atlantic, and the front page of Hacker News.