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In a revealing study, the Bank for International Settlements (BIS) challenges the notion of decentralization in liquidity provision on decentralized exchanges (DEXs).
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This analysis of Uniswap v3 indicates that despite technological advancements, the dominance of institutional liquidity providers (LPs) shapes the DeFi landscape.
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According to BIS researchers, “These players hold about 80% of total value locked and focus their attention on liquidity pools that have the most trading volume and are less volatile.”
This article examines BIS’s findings on liquidity provision in DeFi, highlighting the influence of institutional players on decentralized markets.
The Reality of Liquidity Provision in DeFi: Insights from BIS
The recent working paper by the BIS uncovers a crucial truth: liquidity provision in decentralized finance is not as decentralized as one might think. Despite the technological framework that allows anyone access to liquidity pools, the reality is that the top players dominate the market, skewing the resistance toward decentralization.
Researchers evaluated the Ethereum blockchain’s leading DEX, Uniswap v3, and explored its 250 liquidity pools. Their findings suggest that retail liquidity providers are significantly outpaced by institutional players, who possess the expertise and resources necessary to generate higher returns.
The conclusions are stark—retail LPs earn a mere fraction of trading fees and, on a risk-adjusted basis, may actually lose money. This raises serious questions about the inclusivity that DeFi purportedly offers. The researchers emphasize that the data indicates a trend seen in traditional finance, where a select group of participants drive the market dynamics.
Institutional Influence: A Double-Edged Sword?
The prominence of institutional liquidity providers complicates the foundational ethos of DEXs, which is centered around democratization and equal access to financial markets. The BIS posits that while DeFi may have fewer operational barriers compared to traditional finance, the inherent characteristics leading to centralization persist.