DeFi as an Information Aggregator

Abstract

This paper aims to draw attention to the information aggregation role of DeFi, which has not received as much attention in community discussions as many other DeFi topics yet. A study in this direction seems important, however, given that DeFi intends to rebuild financial markets based on smart contracts, while a large literature in financial economics has studied information aggregation via the market. In those papers, investors submit demand schedules for a risky asset during the trading process: Equilibrium trading quantities are contingent on the realized price, which is an implicit function of all investors’ information, determined by market clearing. Similarly, when agents with dispersed private information interact in a more general setting, they may also want to have their actions contingent on others’, as the aggregate action profile in equilibrium is also an implicit function of everyone’s information. For example, investors in a risky project may want to have individual investment amounts contingent on their total investment amount. A well-designed smart contract that appropriately divides payoffs may thus induce contingent actions that efficiently use the aggregated information, leading to efficient allocations. Therefore, DeFi may improve the information aggregation role of financial markets, in addition to streamlining operations or cutting out the middle-man.