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May 2024 Revised August 2025
JEL classification: G23, D82, L14, L22, G14, D43
Authors: Pablo Azar, Adrian Casillas, and Maryam Farboodi
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 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.
I want to disclose that I own:
1. Profits interests in Algorand Inc. and affiliated entities valued at more than $10,000.
2. Less than $10,000 worth of Ripple and Monero in a Binance account.
Adrian Casillas
The author, Adrian Casillas, declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staffreports/index.html.
Maryam Farboodi
The author, Maryam Farboodi, declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Azar, Pablo, Adrian Casillas, and Maryam Farboodi. 2024. “Natural Centralization in Decentralized Finance.” Federal Reserve Bank of New York Staff Reports, no. 1102, May. https://doi.org/10.59576/sr.1102
