Natural Centralization in Decentralized Finance

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 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.