Bridging the Information Gap: Traditional Finance vs. Blockchain
- Mouazzam Jawed
- Jun 17, 2025
- 6 min read
Updated: Jul 16, 2025
Blockchain has long promised a more transparent and inclusive financial system, where everyone can see what’s happening and act on that information. In contrast, traditional finance often operates behind closed doors, with information guarded by institutions and regulators. This difference in information accessibility is often seen as a key advantage of blockchain. But does blockchain’s transparency really level the playing field, or are market dynamics essentially the same as in traditional finance?
To explore this, I have looked at the “information gap” between traditional finance and blockchain, drawing insights from the Terra Luna crash of May 2022 – a high-profile event that provides real data on how information flows (and fails to flow) in a crisis. Let's compare this with how traditional financial markets handle information and runs, to see if blockchain offers an edge or if, when the chips are down, both systems behave similarly.
Blockchain Transparency: A Double-Edged Sword
In Traditional Finance: Critical information often travels slowly or unevenly. Banks and regulators hold much of the data. For example, during a bank run, an ordinary depositor might not know the bank’s exact financial health – they rely on public reports, news, or even seeing a line of people at the bank. Regulatory bodies can intervene (like central banks providing emergency funds), but communication is top-down. This limited transparency can cause an information gap: insiders vs. outsiders. Classic finance theory suggests this gap fuels bank runs – if depositors lack clear information, rumors can trigger panic.
On the surface, transparency is much greater Blockchain. All transactions are recorded on a public ledger, visible to anyone with an internet connection. You can literally watch money moving in real time. In theory, this means there shouldn’t be big information asymmetries – everyone can see the same data. For instance, on the Terra blockchain, any participant could see large holders moving funds or the health of the system by looking at on-chain metrics.
However, transparency is a double-edged sword: Just because data is public doesn’t mean it’s easy to interpret. The Terra blockchain data was complex, with millions of transactions and smart contracts. It requires skill to analyze and spot problems. In the Terra case, many small investors didn’t fully grasp the risks despite the data being available. Meanwhile, sophisticated players closely watched the blockchain and reacted swiftly. So, while blockchain removes secrecy, it can overwhelm users with information – creating a new kind of gap between those who can analyze it effectively and those who cannot.
Takeaway: Blockchain’s transparency offers potential advantages – real-time insights and no need to trust a third party’s reports. But it also demands user sophistication. In traditional finance, information is scarcer but curated (e.g., banks publish quarterly statements); in blockchain, information is plentiful but unfiltered. The result? The existence of data doesn’t guarantee an equal understanding of that data.
The Terra Luna Crash: What Happened?
To see transparency in action, let’s recap the Terra Luna crash, highlighting how information played a role:
Terra was a blockchain ecosystem featuring an algorithmic stablecoin called UST, designed to maintain a $1 value, and a governance token LUNA. A lending platform called Anchor offered a 19.5% annual yield on UST deposits – extremely high compared to traditional bank interest.
A few large UST holders – call them “whales” – withdrew about $375 million UST from Anchor and sold it
Because transactions are public, investors were essentially watching each other run in real time
In traditional banking, there are circuit breakers – e.g., banks can close for a day, regulators can assure depositors, central banks can inject funds. On Terra, no such official safety net existed. The only backstop was an informal one: Terra’s parent organization tried to defend the UST peg by spending its Bitcoin reserves to buy UST on the market
Death Spiral: Within three days, UST went from $1 to ~ $0.10, and LUNA (meant to absorb UST’s failure) hyperinflated to near zero value
The Terra crash confirmed some advantages of blockchain transparency, but also its limits. On one hand, researchers could later analyze in detail “how and when various participants ran” because the data was all there (which is how we know wealthy investors got out first). On the other hand, during the crash, that transparency didn’t prevent the collapse; if anything, it accelerated the herd behavior. And crucially, it did not protect the smaller, less-informed investors – many of whom either didn’t react in time or even made poor choices like buying more UST thinking they’d catch a bargain.
Information Advantage: Sophisticated vs. Small Investors
One striking finding from the Terra crash is who benefited from the available information:
Sophisticated (Wealthy) Investors: These players often had teams or tools to parse blockchain data. They detected the early warning signs – e.g., large withdrawals, the imbalance in UST’s reserve – and they acted quickly. According to the NBER working paper on the crash, “wealthier and more sophisticated investors were the first to run and experienced much smaller losses”
Smaller (Retail) Investors: Many regular users either did not notice the on-chain signals or didn’t understand them. Some were simply hopeful that Terra’s team would save the day, so they waited. Alarmingly, a significant fraction of smaller holders actually bought UST when it had dropped to $0.990 – thinking it would re-peg to $1 (a classic “buy the dip” move)
Insiders and Information Complexity: Even Terra’s own insiders struggled; the system was so complex that “even insiders [found] it difficult to accurately assess the buildup of risk”
This mirrors what happens in traditional finance, albeit via different mechanisms. In a bank run, typically:
Well-connected or savvy depositors (say, large corporate clients or those tuned into finance chatter) may get wind of trouble and withdraw first.
Smaller depositors might be the last to know – though deposit insurance often protects them up to a limit, they might still face hassle or delays.
In 2008’s financial crisis, for example, hedge funds and institutional investors picked up on stresses in money market funds or banks before the general public did. Similarly, during the 2023 regional bank failures (like Silicon Valley Bank), tech-savvy clients moved funds quickly via mobile banking as soon as Twitter and news reports flagged issues, whereas others realized a bit later.
Key point: Transparency did not equal equality. As researchers concluded, “although prices and large trades were publicly observable on the blockchain, it did not create a level playing field for all depositors”. In fact, open access and transparency did not compensate for differences in financial literacy and resources – it may have even widened the gap. Wealthy actors used the transparency effectively; less wealthy ones were essentially watching a tragedy unfold without understanding it in time.
So, does blockchain offer an advantage? In terms of information symmetry, it has potential – if users can interpret data, they’re not reliant on possibly rosy assurances from bank CEOs or delayed news. The system is more transparent. But in Terra’s case, that transparency benefited those who knew how to use it and did not prevent the collapse. Arguably, it made the collapse more frenetic.
In terms of market performance and stability, blockchain-based systems have proven at least as fragile as traditional ones, if not more so in certain aspects (due to lack of guardrails). A run on a stablecoin can go to zero; a run on an insured bank will rarely leave depositors with zero.
Thus, in terms of outcomes for the average participant, a run in the blockchain world can be more devastating. On the flip side, blockchain didn’t require taxpayer bailouts – the pain was confined to those who took the risk. Some see that as a long-term positive (market cleanses itself).
In conclusion, blockchain does offer an information-rich environment that, in theory, empowers users. In practice, as of now, it has NOT eliminated old patterns of market panic or human herd behavior. The Terra Luna crash illustrated that while the medium changes – from bank ledgers to distributed ledgers – the message remains the same: trust and confidence are fragile, and those with better information (or ability to use it) will always have an edge in a crisis
Are both systems the same in terms of market runs? In spirit, yes – a loss of confidence causes a run in both. The difference is how it plays out. Traditional finance might give you a bit more time and a safety net; DeFi gives you total visibility but no mercy.
Bottom line: Blockchain hasn’t magically solved financial fragility or information asymmetry among people. It has shifted the landscape of information – flattening it technically, but not necessarily practically. To truly capitalize on the transparency advantage, the ecosystem will need to make data actionable and comprehensible for all participants, not just the experts. If that can be achieved, blockchain finance could become more resilient and inclusive than traditional finance. Until then, in terms of market panics, blockchain is running the same human race, just at a different pace
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Disclaimer: The views and opinions expressed in this blog post are those of the author and do not necessarily reflect the official policy, position, or sentiments of the company or its affiliates. Any content provided is for informational purposes only and should not be interpreted as representing the views of the employer.
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