Inclusion and Democratization Through Web3 and DeFi? Initial Evidence from the Ethereum Ecosystem

Abstract

Web3 and DeFi are widely advocated as innovations for greater financial inclusion and democratization. We assemble the most comprehensive dataset to date on the largest Web3 ecosystem and use large-scale computing to investigate the claim. We discuss Ethereum's network structure, time trends, and distributions of transactions, mining, and ownership. Mining income and Ether ownership are concentrated in a few nodes, even after excluding exchange and mining pool wallets, with inequalities more exacerbated than observed in the real economy. Network activities are dominated by large transactions, shifting from peer-to-peer to user-DApps/DeFi interactions, and from Ether-based to ERC-20-token-based. High percentage transaction fees, congestion-induced gas-price fluctuation, suboptimal reserve setting, and large return volatility of tokens disproportionally harm small, unsophisticated, and new nodes, with high failure rates hurting all users. Finally, we present causal evidence that base-fee burning mechanisms (e.g., EIP-1559) and airdrop programs (e.g., OmiseGo Airdrop) promote inclusion and equality through monetary redistribution.