Information Processing in a Transparent Market: Evidence from a DeFi Protocol

We take advantage of a rare setting in a decentralized finance market (the MakerDao Lending Protocol), where each trader’s activities are freely and publicly available in real-time and recorded permanently to the blockchain, to examine traders’ mimicking behavior in this extremely transparent market. We find robust evidence of cross-sectional persistence in traders’ performance. Despite the public availability of all traders’ past and real-time activities, investors’ efficient mimicking does not happen automatically and varies with the information processing costs associated with using the publicly available information on the blockchain.