working papers

2026

1. 

   The DeFi Dilemma

   2026

   with Nikolaus Hautsch and Stefan Voigt

   Abs

   Decentralized finance (DeFi) relies on two building blocks for settlement without trusted intermediaries: public visibility of pending transactions and transaction-fee-based execution priority. We show that these building blocks jointly create front-running risk that deters submission of common-value transactions. The mechanism is analogous to the information production paradox of Grossman and Stiglitz (1980). Because any participant can observe and outbid the originator of a common-value transaction, the originator is not compensated for producing and submitting it in equilibrium. Using granular data on prices and transactions across decentralized exchanges, we document that cross-exchange price differences are large and persistent. Transaction fees consume nearly all realized arbitrage profits, consistent with rent dissipation through front-running competition. Overcoming these inefficiencies is possible only by reintroducing centralized intermediation, undermining the foundational premise of DeFi.