Working Paper: NBER ID: w30949
Authors: Lin William Cong; Ke Tang; Yanxin Wang; Xi Zhao
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 conduct an initial investigation. We describe Ethereum’s network structure, time trends, and distributions of transactions, mining, and ownership. Mining income and Ether ownership are concentrated in exchanges and a few individual nodes. Network activities evolve from peer-to-peer to user-DApps/DeFi interactions, with significantly more transactions by large players. Moreover, high percentage transaction fees, congestion-induced fluctuation of gas prices, suboptimal reserve setting, and large return volatility of tokens present particular challenges for small, poor, unsophisticated, and new nodes, not to mention that the high failure rates hurt all users. Finally, we present suggestive causal evidence that base-fee burning mechanisms (e.g., EIP-1559) and airdrop programs (e.g., OmiseGo Airdrop) facilitate inclusion through token monetary redistribution.
Keywords: Web3; DeFi; financial inclusion; democratization; Ethereum
JEL Codes: D63; E50; G29; H23; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| OmiseGO airdrop (E42) | Increased user participation (D16) |
| Airdrop programs (O36) | Financial inclusion (G21) |
| Transaction fees and network congestion (L90) | Barriers to inclusion (I24) |
| Mechanisms introduced (D47) | Mitigation of barriers to inclusion (I24) |
| EIP1559 (D47) | Redistribution of wealth within the network (D31) |
| EIP1559 (D47) | Reduction in overall mining income for larger players (F69) |
| EIP1559 (D47) | Increase in transaction frequency among smaller users (D16) |